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V 


STABILIZING   THE   DOLLAR 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   ■    CHICAGO  •    DALLAS 
ATLANTA   •    SAN   FRANCISCO 

MACMILLAN  &   CO.,  Limited 

LONDON   •    BOMBAY   •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


STABILIZING    THE 
DOLLAR 

A  PLAK 

TO   STABILIZE   THE    GENERAL   PEICE   LEVEL 

WITHOUT   FIXING   INDIVIDUAL  PRICES 


BY 

IRVING   FISHER 

PROFESSOR    OF    POLITICAL    ECONOMY    IN 

TALE    UNIVERSITY 

EX-PRESIDENT    OF    THE    AMERICAN 

ECONOMIC    ASSOCIATION 


Ncto  gorit 

THE  MACMILLAN  COMPANY 

1920 


AU  rights  reserved 


COPTBIGHT,    1920. 

By  the  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.     Published  January,  1920. 


NorijJooB  l^xtW 

J.  8.  Gushing  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


UNIVEHSIT V  OF  CALIFORNIA 
SANTA  BARBARA 


To 

JOHN  EOOKE 

SIMON  NEWCOMB 

ALFRED   RUSSEL  WALLACE 

AND   ALL   OTHERS 

WHO    HAVE    ANTICIPATED    ME 

IN    PROPOSING   PLANS 

FOB    STABILIZING    MONETARY    UNITS 


PREFACE 

The  fundamental  fact  on  which  the  proposal  of  this 
book  is  based  is  that  the  purchasing  power  of  the  dollar 
is  uncertain  and  variable,  that  is,  that  the  price  level 
is  unstable. 

The  war  has  caused  the  greatest  upheaval  of  prices 
the  world  has  ever  seen.  Inseparably  connected  with 
this  upheaval  is  grave  and  world-wide  industrial  dis- 
content. Because  of  this  and  because  of  the  perplexity 
of  business  men  as  to  future  movement  of  prices,  there 
has  been  much  discussion  going  on  of  the  question 
whether  the  level  of  war  prices  will  drop  or  whether  it 
can  be  stabilized. 

To  show  that  permanent  stability  can  be  secured 
is  the  chief  aim  of  this  book;  and  a  specific  and  de- 
tailed plan  for  this  purpose  is  presented. 

The  first  sketch  of  this  plan  was  published  in  1911 
(in  my  Purchasing  Power  of  Money).  It  was  later 
presented  before  the  International  Congress  of  Cham- 
bers of  Commerce  at  Boston,  September,  1912,  and 
again  before  the  American  Economic  Association, 
December,  1912.  The  plan  was  elaborated  in  the 
Quarterly  Journal  of  Economics,  February,  1913. 

In  October,  1917,  I  gave  the  Hitchcock  lectures  at 
the  University  of  California,  using  much  of  the  ma- 
terial published  now,  for  the  first  time,  in  this  book. 
In  the  spring  of  1918  a  Committee  of  the  American 
Economic   Association,   on  the  Purchasing  Power  of 

vii 


Vm  PREFACE 

Money  in  relation  to  the  War,  indorsed  the  principle 
of  stabilization  and  commended  the  subject  to  the 
earnest  attention  of  statesmen  and  economists. 

By  this  time  academic  economists  had  been  largely 
won  over  to  the  idea,  it  having  run  the  gantlet  of 
their  criticism  for  several  years.  The  general  support 
of  economists  marks  the  first  milestone  in  the  progress 
of  the  idea. 

Latterly  a  beginning  has  also  been  made  toward 
arresting  the  attention  of  the  business  and  industrial 
world,  the  interests  of  which  are  most  at  stake.  Their 
general  approval,  if  obtained,  will  mark  the  second 
milestone. 

Until  recently  it  has  seemed  premature  to  ask  men 
in  pohtical  life  to  press  for  the  actual  adoption  of  the 
plan.  Their  action,  if  taken,  will  mark  the  third  and 
final  milestone. 

Appendix  IV,  §  3,  gives  the  names  and  comments 
of  prominent  leaders  in  all  three  fields  —  economics, 
business,  politics  —  who  have  approved  the  idea. 

When  I  first  propounded  the  plan  for  stabilizing  the 
dollar  I  supposed  that  I  was  the  first  to  do  so.  It 
soon  appeared,  however,  that  the  same  thought  had 
occurred  independently  to  a  number  of  others. 

The  bibliography  in  Appendix  VI  gives  references  to 
the  published  writings  in  which  substantially  the  very 
plan  here  presented  has  been  outlined  by  others. 

There  are  a  few  anticipators  who  have  never  pub- 
lished their  views  but  have  kindly  sent  me  copies  of 
manuscripts  or  letters  describing  them.  The  following 
is  a  complete  list  in  chronological  order  of  anticipators, 
so  far  as  known  to  me :  John  Rooke,  1824 ;  the  late 
Simon  Newcomb,  astronomer   and   economist,   1879; 


PREFACE  IX 

Professor  Alfred  Marshall,  Cambridge,  1887  ;  Aneurin 
Williams,  M.P.,  1892 ;  Professor  J.  Allen  Smith,  now 
Dean,  University  of  Washington,  1896 ;  D.J.  Tinnes, 
Hunter,  North  Dakota,  1896;  William  C.  Foster, 
Boston,  Mass.,  1909 ;  Professor  Harry  G.  Brown, 
University  of  Missouri,  1911 ;  Henry  Heaton,  Atlantic, 
Iowa,  1911. 

This  list  could  be  lengthened  considerably  if  the 
authors  of  plans  radically  different,  but  having  the 
same  purpose  in  view,  were  to  be  included.  Among 
these  authors  is  the  late  Alfred  Russel  Wallace,  the 
naturalist. 

The  only  essential  feature  of  the  plan  in  which, 
apparently,  I  have  not  been  anticipated  is  the  pro- 
vision (mentioned  at  the  end  of  Chapter  IV  and  de- 
scribed, in  detail,  in  Appendix  I,  §  2)  regarding  specula- 
tion in  gold. 

The  fact  that  the  plan  has  been  worked  out  inde- 
pendently in  so  many  cases  and  by  men  so  able  and 
clear-headed  is,  I  venture  to  think,  strong  evidence  of 
the  soundness  of  the  proposal.  It  also  affords  me  the 
opportunity  to  promote  the  plan  the  more  impersonally 
and,  I  hope,  with  more  chance  of  success  than  if  it 
were  merely  one  man's  idea. 

My  thanks  are  due  to  the  large  number  of  persons 
who,  through  many  years,  by  criticisms  and  suggestions, 
have  helped  me  gradually  develop  the  present  formu- 
lation of  the  plan.  I  wish  especially  to  express  my 
thanks  to  Prof.  Wm.  H.  Taft  and  Mr.  Morison  R. 
Waite,  who  supplied  important  legal  data  bearing  on 
the  problems  of  Appendix  I,  §  6 ;  to  Dr.  Royal 
Meeker,  Prof.  Wesley  Clair  Mitchell,  Dr.  B.  M.  An- 
derson, Jr.,  and  Prof.  Percy  W.  Bidwell,  who  supplied 


X  PREFACE 

valuable  criticism  of  portions  of  the  appendix ;  to  Mr. 
Philip  P.  Wells,  formerly  legal  counsel  of  the  National 
Conservation  Association,  who  has  helped  frame  the 
tentative  draft  of  an  act  to  stabilize  the  dollar  given 
in  Appendix  I,  §  9 ;  to  my  brother  Herbert  W.  Fisher, 
whose  criticisms  have  assisted  me  in  improving  the 
form  of  presentation ;  and  to  Miss  Clara  Eliot,  for- 
merly instructor  in  sociology  in  Mills  College,  who  has 
helped  at  every  stage  of  the  work. 

Every  objection  or  difficulty  which  has  been  raised 
has  been,  I  believe,  frankly  faced  and  discussed.  Such 
discussion  has  been  relegated  to  the  appendix,  in  order 
that  the  text  might  be  confined  to  stating  the  plan 
which,  as  will  be  seen,  is  so  simple  that  any  one  can 
readily  grasp  it.  It  has  been  my  ambition  to  reach 
and  convince  every  available  reader. 

If  the  particular  plan  here  proposed  is  not  the  best 
to  accomplish  its  purpose,  I  hope  a  better  one  will  be 
proposed. 

It  is  also  my  hope  that  readers  will  spread  the  idea 
of  stabilization  by  whatever  methods  seem  to  them 
most  effective  for  promoting  legislative  action,  na- 
tional or  international.  I  should  be  glad  to  be  kept 
informed  of  such  activities  as  well  as  to  receive  sug- 
gestions and  criticisms. 

As  a  movement  for  stabilization,  in  some  form, 
seems  inevitable  in  the  immediate  future,  I  shall  be 
glad  to  make  the  best  use  I  can  of  the  return  postal 
card  inserted  here  for  the  convenience  of  the  reader, 
should  he  desire  to  stamp,  sign,  and  mail  it. 

Irving  Fisher. 
November,  1919. 


SUGGESTIONS   TO   READERS 

1.  The  general  reader  will  be  chiefly  interested  in 
the  five  chapters  of  the  text,  of  which  Chapter  IV  is 
the  chief. 

2.  Those  who  find  any  difficulty  in  accepting  the 
argument  in  the  text  are  referred  to  Appendix  II,  of 
which  §  1  and  §  3  will  probably  be  found  of  most 
general  use. 

3.  The  General  Summary  is  designed  for  those  who 
think  they  have  not  time  to  read  the  book. 

4.  The  Summary  by  Sections  will  supply  the  start- 
ing point  for  reading  any  special  part  of  the  text  de- 
sired. 

5.  The  analytical  table  of  contents,  the  index,  and 
the  running  page  headings  have  been  constructed  to 
facilitate  the  use  of  the  book  as  one  of  reference. 

6.  Chapter  II  may  help  those  who  do  not  yet 
believe  that  the  so-called  "high  cost  of  living"  is,  at 
bottom,  a  shrunken  dollar. 

7.  Chapter  III  is  commended  especially  to  those 
who  imagine  that  there  is  little  wrong  with  our  present 
monetary  system. 

8.  Appendix  IV,  §  3,  is  for  those  craving  good 
company  in  espousing  new  ideas. 

9.  Appendices  I  and  III  and  Appendix  II,  §  2,  are 
intended  chiefly  for  technical  economists. 

10.   Appendix  VI  gives  references  for  further  study 
and  verification. 

3d 


SHORT   TABLE   OF  CONTENTS 


Chapter  I.  The  Facts   . 

Chapter  II.  The  Causes 

Chapter  III.  The  Evils    . 

Chapter  IV.  A  Remedy    . 

Chapter  V.  Conclusion 


Appendix  I. 
Appendix  II. 
Appendix  III. 
Appendix  IV. 
Appendix  V. 
Appendix  VI. 


Technical  Details 
Disapproval  of  the 
Alternative  Plans 
Public  Interest 
Precedents 
Bibliography 


Plan 


1 

10 

53 

79 

104 

125 
214 
252 
263 
279 
286 


xiu 


ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 

General  Summary xxv 

Summary  by  Sections xxix 

CHAPTER  I 

THE   FACTS 

1.  Index  Numbers 1 

2.  Medieval  Price  Levels 5 

3.  A  Century  and  a  Quarter   of  Price   Movements 

BEFORE   THE    GrEAT   WaR 6 

4.  Price  Movements  during  the  Great  War         .        .  8 

CHAPTER  II 

the  causes 

1.  False  Scents 10 

2.  Profiteers,  Speculators,  and  Middlemen          .        .  13 

3.  Circular  Reasoning 14 

4.  The  Error  of  Selecting  Special  Cases     ...  16 

5.  The  Argument  from  Probability        ....  17 

6.  The  Argument  from  Statistics 19 

7.  Price  Movements  Vary  with  Monetary  Systems     .  23 

8.  Price  Movements  Vary  with  the  Money  Supply     .  29 

9.  Kinds  of  Inflation 30 

10.  Extent  of  War  Inflation 34 

11.  Money  Illusions 35 

12.  The  Instability  of  the  Gold  Standard  as  Compared 

with  an  Egg  Standard  and  Others         ...  39 

XV 


xvi      ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 

L3.  Seeing  Oueselves  as  Others  See  Us          ...  41 

14.  A  Visit  of  Santa  Claus 45 

15.  Tracing  the  Invisible  Source  of  the  Tide       .        .  49 

16.  Other  Causes  than  Money 51 


CHAPTER  III 

the  evils 

1.  The  Evil  of  High  Prices  Is  Not  General  Impoverish- 

ment       53 

2.  Contracts  Upset 54 

3.  Salaries  and  Wages  Slow  to  Be  Adjusted       .        .  55 

4.  Rates  Fixed  by  Law  or  Custom  Also  Slow     .        .  56 

5.  Periods  before  and  after  1896  Contrasted      .        .  58 

6.  The  Fault  Is  Not  Personal  but  Social  ...  59 

7.  Two  Illustrative  Cases 60 

8.  The  Extent  of  Social  Injustice         .        .        .        .61 

9.  Uncertainty 63 

10.  Trade  Cycles 65 

11.  Resentment  and  Violence 66 

12.  Falling  as  Well  as  Rising  Prices  Cause  Discontent  68 

13.  War  Prices  Cause  Discontent 69 

14.  Adjustments  Most  Needed,  the  Most  Unpopular  .  71 

15.  Bad  Remedies 74 

16.  The  Loss  Is  General 76 

17.  Conclusion 78 

CHAPTER  IV 

A   REMEDY 

1.  Remedies  Which  Have  Been  Proposed      ...  79 

2.  The  Dollar  the  Only  Unit  as  Yet  Unstandardized  81 


ANALYTICAL  TABLE   OF  CONTENTS  XVU 

PAGE 

3.  An  Imaginary  Goods-Dollar 84 

4.  The  Gold  Standard  Not  to  Be  Abandoned      .        .  87 

5.  Merely  the  Weight  of  the  Gold  Bullion  Dollar 

to  Be  Varied 90 

6.  No  Gold  Coins  to  Be  Used 91 

7.  The  Essentials  of  a  Gold  Standard          ...  94 

8.  Periodical  Variations  of  Weight  Based  on  Index 

Numbers      .........  95 

9.  How  THE  Adjustment  Rule  Would  Work          .        .  97 

10.  Proviso   against   Speculation   at   Expense   of  the 

Government 100 

11.  Comparison  with  Other  Plans 101 

CHAPTER  V 

conclusion 

1.  Summary  of  the  Plan 104 

2.  The  Crux  of  the  Plan 105 

3.  Artificiality  of  a  Fixed-Weight  Dollar  .        .        .  106 

4.  Transition  Would  Cause  No  Shock  .        .        .        .107 

5.  Contract-Keeping  Would    Cease    to    Be    Virtual 

Pocket-Picking .        .  108 

6.  Not  a  Cure-All 110 

7.  No  Claim  to  Theoretical  Perfection        .        .        .112 

8.  Why  Has  So  Simple  a  Remedy  Been  Overlooked    .  113 

9.  What  Is  to  Hinder 114 

10.  Precedents 116 

11.  What  Might  Have  Been 116 

12.  What  Is  in  Store 118 

13.  Our  After-War  Opportunity 121 

14.  If  We  Miss  the  Opportunity 122 


XVUl 


ANALYTICAL  TABLE  OF  CONTENTS 


3. 

4. 
5. 
6. 

7. 


APPENDIX  I 

technical  details 

1.  The  Reserve  against  Certificates 

A.   Stabilizing  the  Dollar  Would  Destabilize  the  Present 
100%  Reserve  .... 

Restabilizing  the  100  %  Reserve  . 
The  Reactions  Involved  Thereby 
The    Definite    and    the    Indefinite-Reserve    System 

Contrasted 

Stabihzation  in  Small  and  Large  Nations  Compared 

A  50%  Minimum  Reserve 

How  Soon  Might  the  "Indefinite"  System  Reach  Its 

Limit 

A  Constant  50%  Reserve  and  a  Variable  Surplus 
Putting  the  Surplus  to  Work       .... 

Reactions  Therefrom 

The  Interest  on  Surplus  Would  Save  Taxes 

The  Future 

Summary 

2.  Speculation  in  Gold 

A.  Preventing  "Overnight"  Speculation  . 

B.  Speculation  beyond  One  Adjustment  Period 

C.  Unofficial  Prices  of  Gold 

D.  Conclusion 

Selection  of  the  Index  Number  .... 

Selection  of  the  Par 

What  Shall  Be  Done  with  Existing  Gold  Coins 

What     Shall    Be     Done    Concerning    the    "Gold 
Clause"  in  Existing  Contracts 

Bank  Credit  and  the  Plan  . 

A.  Misconceptions    .... 

B.  The  Effect  of  War  on  Bank  Credit 

C.  Maintenance  of  Redemption 
B.    The  Role  of  Bank  Discount 

8.   International  Aspects  of  the  Plan 
A.   The  Mint  Price   .        .    •    . 


B. 
C. 
D. 

E. 
F. 
G. 

H. 

I. 

J. 

K. 

L. 

M. 


PAGE 


125 

125 
126 
128 

129 
131 
132 

132 
133 
134 
134 
137 
137 
138 
139 
139 
142 
146 
147 
147 
154 
161 

163 
168 
168 
169 
170 
170 
172 
172 


ANALYTICAL  TABLE   OF  CONTENTS  xix 

PAGE 

B.  Gold  Reserves  and  Price  Levels  as  Internationally 

Related 175 

C.  Exports  and  Imports 177 

D.  Spreading  the  Gold  Points  ......     179 

E.  The  Adoption  of  the  Plan  Would  Spread     .        .        .180 

9.  Numerical  Illustrations  under  Various  Assumptions  183 

A.  The  Standard  Hypothetical  Case         ....  183 

B.  Changing  the  Assumption  as  to  the  "Lag"  .         .         .  188 
(a)  Assumptions  same  as  in  standard  case  except: 

lag  changed  from  1  to  2  adjustment  intervals  .  188 
(6)  Assumptions  same  as  in  standard  case  except :  lag 

changed  to  3  adjustment  intervals     .         .         .  189 

(c)   Conclusion  as  to  lag 189 

C.  Changing  the  Assumption  as  to  the  "Tendency"         .  190 

(a)  Assumptions  same  as  in  standard  case   except: 

tendency  increased  from  1%  to  2%  per  ad- 
justment interval 190 

(b)  Conclusion  as  to  tendency 191 

D.  Changing  the  Assumption  as  to  the  "Brassage"  .         .191 

(a)  Assumptions  same  as  in  standard  case  except: 

brassage  changed  from  1%  to  2%      .         .         .     191 

(b)  Assumptions  same  as  in  standard  case  except : 

brassage  changed  from  1%  to  2%  and  also: 
tendency,  first  upward  and  later  downward, 
changed  from  1%  to  2% 192 

(c)  Assumptions  same  as  in  standard  case  except : 

brassage  changed  from  1%  to  2%  and  also: 

lag  changed  from  1  to  3  adjustment  intervals     192 

(d)  Conclusion  as  to  brassage 192 

E.  Changing  the  Assumption  as  to  the  "Adjustment"      .     192 
(a)  Assumptions  same  as  in  standard  case  except : 

adjustment  changed  from  1%  to  2%  (per  1% 
deviation) 192 

(6)  Assumptions  same  as  in  standard  case  except: 
adjustment  changed  from  1%  to  2%  and 
also :  brassage  changed  from  1  %  to  2%  or  above     193 

(c)  Assumptions  same  as  in  standard  case  except :  ad- 
justment changed  from  1%  to  ^%     .        .        •     193 


XX      ANALYTICAL  TABLE  OF  CONTENTS 


PAQB 


(d)  Conclusion  as  to  adjustment 193 

F.  Changing  the  Assumption  as  to  the  "Influence"  .     194 
(a)  Assumptions  same  as  in  standard  case  except: 

influence  decreased  from  1%  to  i%  (per  1% 

of  adjustment) 194 

(6)  Assumptions  same  as  in  standard  case  except : 
influence  changed  from  1%  to  ^%  and  also: 
brassage  changed  from  1%  to  2%  or  more         .     194 

(c)  Assumptions  same  as  in  standard  case  except : 

influence  changed  from  1%  to  2%     .         .         .     195 

(d)  Conclusions  as  to  influence 195 

G.  General  Conclusions  on  Variations  from  the  Assump- 

tions of  the  Standard  Case 196 

H.  The    Stabilization    Process    Applied    to    the    Actual 

Course  of  Prices 199 

(a)  The  assumptions  suitable  for  practical  conditions  199 
(6)  Calculation  of  stabilized  index  number  .         .201 

10.   A  Tentative   Draft  of  an   Act  to   Stabilize  the 

Dollar 205 

APPENDIX  II 

disapproval  of  the  plan 

1.   Misunderstandings 214 

A.  Introduction 214 

B.  "The  Plan  Only  Corrects  Those  Deviations  in  the 

Purchasing  Power  of  the  Dollar  Which  Are   Due 

to  Gold  Causes" 215 

C.  "It  Assumes  'the  Gold  Theory'  —  That  High  Prices 

Are  Due  to  the  Abundance  of  Gold"        .         .         .  215 

D.  "  It  Assumes  the  Quantity  Theory  of  Money "     .         .  215 

E.  "It  Contradicts  the  Quantity  Theory"        .         .         .216 

F.  "It  Aims  to  Fix  All  Prices" 217 

G.  "It  Would  Interfere  with  Supply  and  Demand"  .  219 
H.  "ItisaPlantoControlthc  Value  of  Gold"  .  .  220 
/.  "It  Works  Only  through  the  Flow  of  Gold"  .  .  220 
J.  "It  Would  Shift  to  the  Government  the  Losses  Now 

Borne  by  Private  Contracting  Parties"    .         .         .    221 


ANALYTICAL  TABLE  OF  CONTENTS 


XXI 


K. 
L. 

M. 


N. 


"It  Would  Make  a  Pretext  for  Raising  Prices"   . 
"It  Would  'Tamper'  with  the  Standard  of  Value"      . 
"Changes  in  the  Weight  of  the  Dollar  Cannot  Affect 

Its    Value  because    Only  Government    Fiat    Can 

Fix  the  Value  of  Monej^" 
"It  Is  a  Fiat  Money  System "     . 


2.  Alleged  Defects    .... 

A.  "A  Goods-Dollar  Is  Not  Ideal"  . 

B.  "People  Could  'Contract  Out'  " 

C.  "It  Would  Be  Destroyed  by  War" 

D.  "It  Could  Not  Check  Rapid  Changes 

E.  "It  Is  Too  Inelastic"  . 

F.  "The  Correction  Comes  Too  Late" 

G.  Conclusion  on  Alleged  Defects     . 

3.  The  Obstacle  of  Conservatism    . 

A.  "It  Has  Never  Been  Tried" 

B.  "The  Tide  May  Turn" 

C.  "It  Requires  Governmental  Interference" 

D.  "We  Could  Not  Interest  Other  Countries" 

E.  "The  Evils  Are  Unreal"      . 

F.  Conclusion  ..... 

4.  The  Obstacle  of  Special  Interests 

A.  Debtor  and  Creditor    . 

B.  Gold  Producers    .... 

C.  Devotees  of  Panaceas  . 

D.  Speculators 

APPENDIX  III 

ALTERNATIVE    PLANS 

1.  A  Sound  Alternative 252 

A.  Introduction 252 

B.  Redemption  Warrants 253 

C.  Unrestricted  Redemption  via  Warrants        .         .         .  254 

D.  Unrestricted  Deposit  of  Goods-Dollars         .        .        .  255 

E.  Summary 256 

2.  The  Same  System  Modified  by  the  Omission  of  "Free 

Coinage" 257 


PAOE 

222 
222 


223 
224 

224 
224 
225 
226 
228 
229 
229 
230 
231 
231 
233 
233 
235 
235 
236 

240 
240 
248 
250 
251 


xxii  ANALYTICAL  TABLE   OF   CONTENTS 

PAGE 

3.  The    Same    System    Modified    by    the    Omission    of 

Redemption 258 

4.  A  Money  Based  on  Labor 259 

5.  Governmental  Control  of  Gold  Production     .        .  260 

6.  The  Tabular  Standard 260 

APPENDIX  IV 

PUBLIC   interest 

1.  Either  an  Upheaval  or  a  Collapse  of  Prices  Weakens 

Confidence  in  Money 263 

2.  The  Present  Plan  Grew  Out  of  the  Price  Move- 

ment Beginning  in  1896 272 

3.  Approval  of  the  Plan  for  Stabilizing  the  Dollar.    274 

APPENDIX  V 

PRECEDENTS 

L  Contracts  in  Terms  of  a  Commodity  ....  279 

2.  The  Tabular  Standard 280 

3.  Correcting  the  Money  Unit  Itself    ....  284 

4.  Conclusion 285 

APPENDIX  VI 

bibliography 

1.  Some  of  the  Chief  Index  Numbers  Current    .        .    286 

2.  Some  op  the  Chief  Writings  on  the  Principles  of 

Index  Numbers 288 

3.  Remote    Anticipations    op    the    Plan    to  Stabilize 

the  Dollar 288 

A.  Bimetallism 288 

B.  Gold  Exchange  Standard 289 

C.  Irredeemable  Paper  Money 290 

D.  The  Tabular  Standard 291 

4.  Direct  Anticipations 293 

5.  Recent  Writings  on  Stabilizing  the  Dollar    .        .  294 


LIST   OF   DIAGRAMS 

(In  all  cases  the  diagrams  are  plotted  on  the  "ratio  chart" 
in  which  the  vertical  scale  is  so  arranged  that  the  same  slope  always 
represents  the  same  percentage  rise.  For  a  full  description  of  the 
advantages  of  this  method  the  reader  is  referred  to  "The  Ratio 
Chart,"  Irving  Fisher,  Quarterly  Publications  of  the  American  Statis- 
tical Association,  June,  1917.) 

FIQ.  PJlQE 

1.  Price    Movements    as     Calculated   by   Different 

Methods 3 

2.  Price  Movements  as  Calculated  by  Using  Differ- 

ent Numbers  of  Commodities  ....        4 

3.  Price  Movements  of  the  United  States  and  Eng- 

land from  the  Earliest  Index  Numbers  through 
the  First  Years  op  the  Great  War     ...        7 

4.  Movements  of  Retail  and  Wholesale  Prices         .      14 

5.  Price  Movements  in  Five  Gold-Standard  Countries      24 

6.  Price  Movements  in  the  United  States  under  the 

"Greenback"  Standard  and  in  the  United  King- 
dom UNDER  the  Gold  Standard      ....      25 

7.  Price  Movements  in  England  and  India  under  Dif- 

ferent Monetary  Standards 27 

8.  The  Ratio  of  the  American  to  the  English  Price 

Level  Compared  with  the  Ratio  of  American  to 
English  Money         .        .        .       ••        •.       •        -28 

9.  Money  and  the  Price  Level 31 

10.   The  Level  of  Prices  of  Commodities  in  Terms  op 

Gold  Contrasted  with  Its  Reciprocal  (the  Pur- 
chasing Power  of  the  Dollar  in  Terms  of  Com- 
modities) and  with  the  Price  of  Gold         .        .      40 

xxiii 


Xxiv  LIST  OF  DIAGRAMS 

FIG.  PAGE 

11.  The  Relative  Stability   op  Certain  Commodities, 

Each  Measured  in  Terms  of  Commodities  in  Gen- 
eral     42 

12.  The  Index  Number  with  and  without  Stabilization    204 

13.  The  Price  of  Wheat  in  Terms  of  Gold  and  in  Terms 

OF  Commodities 218 


GENERAL     SUMMARY 

The  war  has  wrought  havoc  with  monetary  systems 
throughout  the  world.  War  finance  has  given  us 
inflation  of  various  kinds  —  paper  money  inflation 
and  bank-credit  inflation  among  belhgerents  and  gold 
inflation  among  neutrals  —  with  the  result  that  every- 
where prices  have  risen,  i.e.  the  purchasing  power  of 
money  has  fallen,  even  where  there  has  been  no  scarcity 
of  goods. 

The  war  has  thus  greatly  aggravated  the  evil  of  a 
rising  cost  of  living  of  which  there  had  already  been 
a  growing  and  world-wide  complaint.  This  pre-war 
high  cost  of  living  was,  likewise,  largely  due  to  monetary 
inflation. 

Prior  to  1896  there  was  equal  dissatisfaction  over 
falling  prices  attributable,  in  part,  to  the  fact  that  the 
volume  of  gold  and  other  currency  did  not  keep  pace 
with  the  requirements  of  business. 

These  two  experiences  in  a  single  generation  have  set 
a  larger  number  of  persons  thinking  on  the  instability 
of  monetary  units  than  ever  before  in  history. 

The  cumulative  effect  is  a  rapidly  spreading  con- 
sciousness that  the  price  level,  on  which  business  is 
conducted,  is  now  largely  at  the  mercy  of  monetary 
and  credit  conditions.  To-day  the  general  public  is 
willing  to  acknowledge,  as  before  the  war  it  was  not, 
that  the  tide  of  prices  will  rise  with  a  flood  of  gold  or 
paper  money  or  bank  credit.     As  a  consequence  there 

XXV 


XXvi  GENERAL  SUMMARY 

is  coming,  slowly  but  surely,  a  revolution  in  economic 
thought  similar  to  the  revolution  in  astronomic  thought 
begun  by  Copernicus. 

Just  as  we  then  learned  that  the  sun  and  moon  and 
stars  do  not  really  rise  and  set  —  though  they  move 
somewhat  —  but  that  what  so  appears  is  really  the 
revolution  of  the  earth  on  its  axis,  so  we  are  now  learn- 
ing that  commodities  as  a  whole  do  not  really  rise  and 
I  fall  much  but  that  what  so  appears  is  really  the  gyra- 
tions of  the  dollar. 

The  truth  is,  that  the  purchasing  power  of  money 
has  always  been  unstable.  The  fundamental  reason 
is  that  a  unit  of  money,  as  at  present  determined,  is 
not,  as  it  should  be,  a  unit  of  purchasing  power,  but  a 
unit  of  weight.  It  is  the  only  unstable  or  inconstant 
unit  we  have  left  in  civilization  —  a  survival  of  bar- 
barism. Other  units,  the  yard,  pound,  bushel,  etc., 
were  once  as  unstable  and  crude  as  the  dollar  still  is, 
but,  one  after  another,  they  have  all  been  stabilized 
or  standardized. 

There  was,  until  recently,  ample  excuse  for  an  un- 
stable dollar.  Up  to  the  present  generation  no  instru- 
ment for  measuring  its  aberrations  had  been  devised. 
In  the  same  way,  until  the  weighing  scales  were  devised, 
weights  could  not  be  standardized,  and  until  instruments 
for  measuring  electrical  magnitudes  were  invented, 
I  electrical  units  could  not  be  standardized.  But  for 
many  years  we  have  now  possessed  in  the  "  index 
number"  of  prices  the  necessary  instrument  for  meas- 
uring the  value  of  the  dollar  in  terms  of  its  power  to 
purchase  goods. 

One  of  the  most  suggestive  signs  of  the  times  is  that 
this  instrument  for  measuring  changes  in  the  purchasing 


GENERAL  SUMMARY  XXVll 

power  of  money  has  recently  been  utilized  in  adjusting 
wages  and  salaries  to  the  high  cost  of  living,  i.e.  to 
the  depreciated  dollar.  A  number  of  conmiercial 
concerns  and  banks,  and  some  official  agencies  have 
amended  wages  by  use  of  an  index  number  of  the  cost 
of  living. 

I  believe  it  is  manifest  destiny  that  this  principle 
will  be  utilized  more  generally  to  safeguard  agreements 
made  at  one  date  to  pay  money  at  another  date.  With 
our  present  unstable  dollar,  the  just  intent  of  such 
agreements  is  constantly  being  balked  by  a  change  in 
prices.  Gradually  such  corrections  of  the  dollar  will 
break  down  the  popular  superstition  that  "a  dollar 
is  a  dollar  ' ' ;  for  every  time  we  correct  the  dollar  we 
convict  it  of  needing  correction.  Ultimately  the  cor- 
rection will  surely  be  applied  not,  as  at  present,  as 
a  patch  on  the  dollar  from  the  outside,  but  by  incor- 
porating it  in  the  dollar  itself. 

Various  methods  for  accomplishing  this  have  been 
proposed.  The  one  elaborated  in  this  book  is  to  vary 
the  weight  of  the  gold  dollar  so  as  to  keep  its  pur- 
chasing power  invariable.  We  now  have  a  gold  dollar 
of  constant  weight  and  varying  purchasing  power ; 
we  need  a  dollar  of  constant  purchasing  power  and, 
therefore,  of  varying  weight. 

In  this  way  we  can  control  the  price  level.  The 
more  gold  in  the  dollar  the  greater  its  buying  power 
and  the  lower  the  price  level.  If  Mexico  should  adopt 
our  dollar  (instead  of  its  present  dollar  of  half  the 
weight  of  gold) ,  the  price  level  in  Mexico  would  be  cut 
in  two.  Or,  if  we  should  adopt  the  Mexican  dollar 
instead  of  ours,  our  price  level  would  be  doubled. 
So  if  prices  tend  to  rise  or  fall,  we  can  correct  this 


XXVlll  GENERAL  SUMMARY 

tendency  by  loading  or  unloading  the  gold  in  our 
dollar,  employing  an  index  number  of  prices  as  the 
guide  for  such  adjustments. 

The  process  for  doing  this  is  as  simple  as  clock- 
shifting  for  daylight-saving  and  would  produce  its 
effects  as  unobtrusively.  Whether  this  or  some  other 
method  be  the  particular  one  finally  adopted  for  reach- 
ing the  desired  end,  it  is  of  the  utmost  importance,  in 
the  interests  of  justice  to  creditor  and  debtor,  stock- 
holder and  bondholder,  employer,  employee,  insurance 
beneficiary,  savings  bank  depositor,  trust  foundations, 
public  utilities,  etc.,  that  some  method  of  stabilizing 
our  monetary  units  shall  be  adopted  as  one  of  the 
fundamental  measures  of  reconstruction,  relating  to 
the  currency. 

Otherwise  we  shall  perpetuate  a  chief  source  of 
social  injustice,  discontent,  violence,  and  Bolshevism. 
Only  one  real  obstacle  stands  in  our  way  —  conserv- 
atism. 

But  to-day,  as  a  result  of  the  war,  there  is  a  new 
willingness  to  entertain  new  ideas.  That  is,  the  war 
has  loosened  the  fetters  of  tradition.  It  was  the 
French  Revolution  which  led  to  the  metric  system. 
It  would  not  be  surprising  if,  as  is  being  suggested, 
this  war  should  give  Great  Britain  a  decimal  system 
of  money,  revise  the  monetary  units  of  the  nations  so 
that  they  shall  be  even  multiples  of  the  franc,  give  us 
an  international  money  and  stable  pars  of  exchange 
and,  as  the  greatest  reform  of  all,  as  well  as  the  simplest, 
give  us  a  monetary  system  in  which  the  units  are 
actually  units  of  value  in  exchange,  as  they  ought, 
and  were  intended,  to  be. 


SUMMARY  BY  SECTIONS 
Chapter  I.     The  Facts 

1.  Index  Numbers.  An  index  number  of  prices 
shows  the  average  percentage  change  of  prices.  Thus, 
taking  1913  as  a  basis  for  comparison  and  calling  its 
price  level  100%,  the  index  number  representing  the 
price  level  of  1917  was  176%,  and  of  1918,  196%. 
There  are  many  different  methods  of  computing  indesTf 
numbers,  but  their  results  usually  agree  approximately^ 
(Figures  1  and  2.) 

2.  Medieval  Price  Levels.  Prices  have  usually 
risen.  In  France,  before  the  war,  prices  were  five  or 
ten  times  those  of  a  thousand  years  before.  Prices 
have  often  risen  much  more  than  this,  especially  after 
paper  money  inflation,  as  in  the  French  Revolution, 
in  the  American  Revolution,  and  in  the  present  war, 
especially  in  Russia. 

3.  A  Century  and  a  Quarter  of  Price  Movements 
before  the  Great  War.  (Figure  3.)  Between  1789  and-  K 
1809  prices  doubled  in  England ;  between  1809  and 
1849  they  fell  all  the  way  back,  and  more ;  between 
1849  and  1873  they  rose  50%.  Between  1873  and  1896, 
in  gold  standard  countries  prices  fell,  while  in  silver 
standard  countries  prices  rose.  Between  1896  and 
1914  prices  in  the  United  States  and  Canada  rose  50%, 
and  in  the  United  Kingdom,  35%. 

xxix 


w 


XXX  SUMMARY  BY  SECTIONS 

4.  Price  Movements  during  the  Great  War.  Dur- 
ing the  war  prices  in  the  United  States  rose  seven  or 
eight  times  as  rapidly  as  in  the  last-named  period.  In 
Europe  the  rise  was  even  faster,  —  fastest  of  all  in 
Russia.  Prices  doubled  in  the  United  States  and 
England,  trebled  in  western  Europe,  and  increased 
ten-  or  twentyfold  in  Russia.  The  purchasing  power 
of  a  dollar  to-day  in  the  United  States  is  about  that 
of  35  cents  in  1896. 

Chapter  II.     The  Causes 

1.  False  Scents.  Of  forty-one  causes  alleged  for 
the  high  cost  of  living,  some  are  important  factors 
in  raising  particular  prices,  but  none  of  them,  except 
the  war,  has  been  an  important  factor  in  raising  the 
general  level  of  prices,  and  that  factor,  of  course,  only 
recently.  Prices  have  risen  where  there  were  and 
where  there  were  not  trusts,  trade  unions,  tariffs,  luxury, 
advertising,  militarism,  sanitation,  the  individual  pack- 
age, etc. 

2.  Profiteers,  Speculators,  and  Middlemen.  Spec- 
ulation regulates  but  seldom  successfully  manipulates 
price  movements.  Middlemen's  profits  have  declined 
while  prices  were  rising.     (Figure  4.) 

3.  Circular  Reasoning.  High  prices  of  labor  may 
tend  to  raise  prices  of  commodities  and  vice  versa.  But 
these  and  other  influences  between  two  classes  of  prices 
do  not  explain  the  general  rise  of  all  classes  of  prices. 
Prices  cannot  lift  themselves  by  their  own  bootstraps. 

4.  The  Error  of  Selecting  Special  Cases.  No  one 
commodity  is  important  enough  to  influence  greatly 
the  price  level.  Wheat  must  rise  20%  to  raise  the 
price  level  1%,  other  things  equal. 


SUMMARY  BY   SECTIONS  XXXl 

People  unconsciously  pick  out  special  exceptional 
cases  of  commodities,  the  supply  of  which  has  decreased 
or  the  demand  for  which  has  increased,  without  realizing 
that  they  are  exceptional.  The  more  exceptional  they 
are  the  more  publicity  is  given  to  them,  and  the  public 
is  given  a  wrong  perspective. 

5.  The  Argument  from  Probability.  Most  would-be 
explanations  make  one  fatal  mistake  of  looking  only 
at  the  goods  side  and  not  at  the  money  side.  When 
216  out  of  243  commodities  rise  in  price  between  1896 
and  1913,  the  remarkable  coincidence  can  be  most 
simply  explained  by  assuming  a  common  cause,  the 
cheapening  of  the  dollar.  Such  a  simple  explanation 
is  more  likely  to  be  correct  than  the  concurrence  of 
separate  explanations  for  the  many  commodities. 

6.  The  Argument  from  Statistics.  Figures  for  crops 
and  trade  and  estimates  of  national  income  show  in 
general  no  progressive  scarcity  of  goods  between  1896 
and-  the  World  War  to  explain  rising  prices  but,  on  the 
contrary,  a  general  progressive  abundance.  Even  dur- 
ing the  war  the  volume  of  trade  in  the  United  States 
increased  somewhat.  Mr.  0.  P.  Austin  has  shown  that 
during  the  war  there  has  been  a  rise  in  the  prices  of 
goods  not  used  in  war,  such  as  Manila  hemp  in  the 
Philippines,  sisal  grass  in  Yucatan,  and  diamonds  in 
South  Africa,  even  in  the  countries  producing  these 
goods  and  far  removed  from  the  seat  of  war. 

Lord  D'Abernon  has  shown  that  old  books,  prints, 
and  coins,  having  no  cost  of  labor  and  materials,  have 
risen. 

7.  Price  Movements  Vary  with  Monetary  Systems. 
Countries  of  like  money  have  like  price  movements  and 
countries  of  unlike  money  have  unlike  price  move- 


XXXll  SUMMARY  BY  SECTIONS 

ments.  Thus  the  price  movements  of  gold  standard 
countries  are  very  similar  (Figure  5),  and  the  price 
movements  of  silver  standard  countries  are  similar; 
but  the  price  movements  of  gold  standard  countries 
differ  from  those  of  silver  standard  countries  as  the 
ratio  of  gold  to  silver  changes.  Countries  of  excep- 
tional standards  have  exceptional  price  movements. 
(Figures  6,  7,  and  8.)  During  the  World  War  the 
prices  rose  differently  in  different  countries  according 
to  their  different  degrees  of  inflation. 

8.  Price  Movements  Vary  with  the  Money  Supply. 
The  price  level  fluctuates  largely  with  the  fluctuation  in 
the  quantity  of  money.  (Figure  9.)  Great  increases  in 
the  production  of  the  money  metals  as  in  the  sixteenth 
century  and  in  the  '50s  and  again  in  the  '90s  of  the 
last  century,  are  followed  by  great  price  upheavals. 
During  the  Great  War  the  price  level  in  various  coun- 
tries was  found  to  vary  with  the  quantity  of  money. 

g.  Kinds  of  Inflation.  Besides  the  inflation  from 
great  issues  of  paper  money,  there  is  gold  inflation, 
such  as  the  United  States  experienced  in  1915-1917; 
and  credit  inflation,  such  as  all  belligerents  experienced. 

10.  Extent  of  War  Inflation.  Outside  of  Russia 
this  is  about  threefold,  money  having  increased  from 
li5  to  45  billions  and  deposits  from  27  to  75  billions. 
Prices  have  risen  accordingly. 

11.  Money  Illusions.  Money  always  seems  scarce 
even  when  superabundant.  The  individual  always 
wants  more  than  he  has  and  is  apt  to  think  that  a 
whole  country  would  be  benefited  by  more  money. 
He  doesn't  realize  that  the  more  money  there  is  the 
less  it  will  buy.     He  keeps  thinking  of  a  dollar  as  fixed. 

Some  allege  that  gold  is  stable  because  its  price  is 


SUMMARY  BY  SECTIONS  •  xxxill 

constant.  But  gold  is  worth  about  $20  an  ounce 
merely  because  an  ounce  of  gold  is  about  twenty  dollars. 
Gold  is  fixed  only  in  terms  of  gold,  not  in  terms  of 
the  other  things  it  purchases.  A  cheapening  of  gold 
cannot  express  itself  in  a  lower  price  of  gold  but 
only  in  a  higher  level  of  prices  of  other  things. 

12.  The  Instability  of  the  Gold  Standard  as  Com- 
pared with  an  Egg  Standard  and  Others  is  as  great, 
and  greater  than  that  of  a  carpet  standard.  (Figures 
10,  11,  and  12.) 

13.  Seeing  Ourselves  as  Others  See  Us.  When 
prices  in  gold  countries  were  going  down  and  those  in 
silver  countries  were  going  up,  the  Londoner  would 
say  that  Indian  prices  rise  because  silver  is  depreciat- 
ing and  the  Hindu  would  say  that  English  prices  fall 
because  gold  is  appreciating.  Each  sees  the  other's 
change  but  finds  it  hard  to  realize  his  own,  just  as  we 
find  it  hard  to  realize  that  the  earth  revolves. 

14.  A  Visit  of  Santa  Claus  is  supposed  to  double 
the  money  in  every  pocket,  till,  and  bank.  The  next 
day  the  average  man  has  twice  the  money  he  needs  to 
carry.  He  spends  the  surplus  and  this  extra  demand 
for  goods  raises  prices.  But  since  this  surplus  money 
is  still  in  circulation,  so  it  is  spent  again  and  again,  rais- 
ing prices  until  they  double,  when  it  ceases  to  be  a 
surplus ;  for  at  these  prices  twice  the  pocket  money, 
till  money,  and  bank  money  used  before  are  needed. 

Something  like  this  happens  when  gold  miners  bring 
gold  to  the  mint.  They  can't  carry  the  new  gold  in 
their  pockets.  They  spend  most  of  it  and  so  bid  up 
prices  in  the  mining  camp.  Then  the  holders  of  this 
gold  spend  it  outside  of  the  camp  where  they  can  buy 
cheaper.     This  raises   the  prices  outside.     Thus   the 


xxxiv  SUMMARY  BY   SECTIONS 

new  gold  pursues  low  prices  throughout  the  world  and 
raises  them. 

15.  Tracing  the  Invisible  Source  of  the  Tide.     The 

rise  of  prices  from  inflation  seems  mysterious  because, 
in  any  individual  case,  such  as  the  rise  of  butter  at  a 
grocery  store,  the  only  visible  reason  is  the  rise  of  some 
other  price,  such  as  the  wholesale  price  of  butter.  The 
effect  of  the  abundance  of  money  among  the  grocer's 
customers  is  too  small  and  gradual  to  be  observed. 
But  this  small,  unobserved  element  was  also  present 
as  a  part  explanation  of  the  rise  of  the  wholesale  price 
and  of  every  anterior  price  which  helps  explain  that 
price.  This  element,  apparently  so  small  in  any  one 
market,  turns  cut  to  be  the  large  element  when  all 
markets  are  considered. 

16.  Other  Causes  than  Money  include  bank  de- 
posits, the  velocity  of  circulation  of  money  and  of 
deposits,  and  the  volume  of  trade.  Usually  the  chief 
factor  is  money. 

Chapter  III.     The  Evils 

1.  The  Evil  of  High  Prices  Is  Not  General  Impover- 
ishment. If  all  prices  and  incomes  rose  equally,  no 
harm  would  be  done  to  any  one.  But  the  rise  is  not 
equal.     Many  lose  and  some  gain. 

2.  Contracts  Upset.  When  prices  rise,  the  creditor 
loses ;  when  they  fall,  the  debtor  loses. 

3.  Salaries  and  Wages  Slow  to  Be  Adjusted.  They 
rise  or  fall  more  slowly  than  prices.  The  purchasing 
power  of  wages  just  before  the  United  States  entered 
the  war  averaged  only  two  thirds  of  what  it  was  ten 
years  earlier  and  after  the  war  it  was  still  less. 

4.  Rates  Fixed  by  Law  or  Custom  Also  Slow.  Trolley 


SUMMARY  BY  SECTIONS  XXXV 

fares,  for  instance,  remained  the  traditional  five  cents 
through  two  decades  of  rising  prices. 

5.  Periods  before  and  after  1896  Contrasted.  Be- 
fore 1896  the  "  bloated  bondholder "  was  gaining. 
Money  lenders  like  Russell  Sage  rolled  up  wealth. 
They  could  not  have  done  so  after  1896.  Even  had 
they  saved  every  penny  of  interest  and  compounded 
it,  they  would  have  had  less  actual  purchasing  power 
now  than  when  they  started.  The  newly  rich  to-day 
are  not  bondholders  but  stockholders. 

6.  The  Fault  Is  Not  Personal  but  Social,  so  that 
we  ought  not  to  blame  the  lucky  winners  in  the  lottery 
but  abolish  the  lottery. 

7.  Two  Illustrative  Cases.  A  working  girl  who  in 
1896  put  a  hundred  dollars  in  the  savings  bank  and 
let  it  accumulate  at  3%  would  now  have  nominally 
twice  what  she  put  in,  but  prices  are  more  than  two 
and  a  half  times  what  they  were  in  1896.  Likewise 
the  bondholder  has  had  no  real  interest.  He  has 
cut  his  coupons  and  cashed  them,  but  his  principal, 
nominally  intact,  is,  in  actual  purchasing  power,  less 
than  half  what  it  was.  He  has  been,  in  effect,  eating 
up  his  capital. 

8.  The  Extent  of  Social  Injustice.  Probably  a 
hundred  billions  of  dollars'  worth  of  purchasing  power 
have  actually,  though  not  nominally,  changed  hands 
since  1896  through  the  depreciation  of  the  dollar. 

9.  Uncertainty.  Such  losses  would  be  largely  fore- 
stalled if  they  could  be  foreseen.  But  few  except 
speculators  even  try  to  foresee  price  movements.  The 
chief  evil  of  an  unstable  dollar  is  its  uncertainty. 

10.  Trade  Cycles.  When  prices  rise,  great  profits 
lead  to  overextension  of  business  and  credits  and  some- 


XXXvi  SUMMARY  BY   SECTIONS 

times  to  a  crisis,  after  which  contraction  leads  to  a  fall 
of  prices  and  depression  of  trade.  The  unstable  dollar 
is  a  fundamental  element  in  these  cycles. 

11.  Resentment  and  Violence.  The  fact  that  the 
evil  effects  of  an  unstable  dollar  are  usually  not  at- 
tributed to  their  true  cause  results  in  suspicion,  class 
hatred,  and  violence. 

12.  Falling  as  Well  as  Rising  Prices  Cause  Dis- 
content. E.g.  before  1896  the  western  farmer  hated 
the  eastern  capitalist  whose  mortgages  he  found  in- 
creasing in  weight  owing,  he  thought,  to  some  manipu- 
lation of  the  market  of  money  or  produce  or  both. 

13.  War  Prices  Cause  Discontent.  Before  the  war 
the  rising  cost  of  living  was  making  Socialists,  and  the 
fear  of  class  war  within  Germany  was  one  reason  for 
precipitating  a  war  with  other  nations.  Likewise  the 
rise  of  prices  during  the  war  is  a  chief  cause  of  the 
popular  unrest  we  now  find. 

14.  Adjustments  Most  Needed,  the  Most  Unpop- 
ular. E.g.  railways  and  landlords  have  long  suf- 
fered from  the  rise  of  prices,  but  the  public  has  all 
the  more  strenuously  opposed  a  corresponding  rise 
of  their  rates  or  rents.  Even  the  employer  who  has 
gained  by  rising  prices  often  opposes  a  corresponding 
rise  of  wages.  Everybody  opposes  the  rise  of  any- 
body else's  charges,  because  they  have  their  minds 
set  on  a  general  reduction.  As  a  general  reduction 
is  impossible  it  is  better  to  level  up  the  few  prices 
which  are  too  low  relatively  to  the  rest. 

15.  Bad  Remedies.  The  pubhc  fails  to  understand 
the  cause  of  price  movements,  but  it  sees  who  has 
made  money  out  of  them  at  the  expense  of  others  and 
seeks  a  remedy  against  these  winners.    Every  remedy 


SUMMARY  BY  SECTIONS  XXXVll 

offered  gets  a  hearing.  Some  of  these  are  bad.  Such 
was  "  free  silver  "  proposed  in  1896  and  such  is  much 
of  the  reckless  radicalism  of  to-day. 

i6.  The  Loss  Is  General.  Few  gain  permanently 
either  from  rising  or  falling  prices,  for  the  envious  losers 
contrive  in  some  way  to  balk  them,  e.g.  by  sabotage. 
Again  when  prices  fall  foreclosures  are  forced  which 
throw  the  management  of  industry  into  hands  often 
ill  fitted  for  the  task.  In  short,  in  the  end,  almost  every 
one  loses  from  an  unstable  dollar. 

17.  Conclusion.  An  unstable  dollar  is  the  unsus- 
pected cause  of  many  of  the  greatest  events,  including 
the  greatest  evils  and  injustices,  which  history  records. 

Chapter  IV.     A  Remedy 

1.  Remedies  Which  Have  Been  Proposed.    The  43 

remedies  proposed  almost  ignore  the  money  side  of 
the  problem.  They  aim  at  economy  and  efficiency, 
and  concern  the  problem  of  our  incomes  rather  than  that 
of  the  purchasing  power  of  the  dollar. 

2.  The  Dollar  the  Only  Unit  as  Yet  Unstandardized. 
The  dollar  is  now  a  unit  of  weight,  not  a  unit  of  power 
to  purchase  goods,  which  is  what  we  need.  We  have 
gradually  stabilized  or  standardized  every  other  unit 
used  in  commerce,  including  the  yard,  pound,  bushel, 
horsepower,  volt.  Formerly  these  were  as  roughly 
defined  as  the  dollar  is  now.  The  yard  was  once  the 
girth  of  the  chief. 

3.  An  Imaginary  Goods-Dollar.  Two  commodities 
Hke  gold  and  silver  make  a  better  standard  than  one  and 
many  make  a  better  standard  than  two.  The  dollar 
standard  should  be  worth  a  specified  bill  of  goods  such 
as  one  board  foot  of  lumber,  fifteen  pounds  of  coal, 


XXXviii  SUMMARY  BY  SECTIONS 

half  a  pound  of  sugar,  half  an  ounce  of  butter,  a  quarter 
of  an  ounce  of  leather,  a  quarter  of  a  pound  of  steel, 
etc.  Such  an  aggregate  of  goods,  selected  on  the  basis 
of  their  relative  importance  in  trade,  may  be  called 
a  goods-dollar  or  a  market-basket  dollar. 

4.  The  Gold  Standard  Not  to  Be  Abandoned.  Such 
a  goods-dollar  would  be  a  good  standard  of  value  but  a 
poor  medium  of  exchange,  being  too  heavy,  bulky, 
perishable.  It  is  proposed  therefore  to  retain  gold  as 
a  medium  of  exchange  but  to  correct  the  gold  dollar 
so  as  to  make  its  value  equal  to  that  of  the  imaginary 
goods-dollar. 

5.  Merely  the  Weight  of  the  Gold  Bullion  Dollar  to 
Be  Varied,  The  gold  dollar  is  to  be  thus  corrected  by 
changing  its  weight.  A  Mexican  dollar  is  only  half 
as  heavy  as  ours  and  so  buys  only  half  as  much  as  it 
would  if  it  were  of  the  same  weight. 

6.  No  Gold  Coins  to  Be  Used.  We  have  already 
changed  the  weight  of  our  gold  dollar  twice.  It  would 
be  easy  to  change  it  every  month  or  so,  and  especially 
easy  if  we  give  up  having  coined  gold.  To-day  gold 
circulates  mostly  by  proxy  —  through  paper  certificates. 
It  could  do  so  entirely.  The  certificates  are  redeem- 
able in  gold  bullion  bars.  The  proposal  is  simply  to 
change  the  rate  at  which  these  bars  are  exchangeable 
for  certificates  from  the  present  fixed  rate  of  23.22 
grains  of  pure  gold  for  each  dollar  of  certificates  to  a 
higher  or  lower  rate  from  time  to  time. 

7.  The  Essentials  of  a  Gold  Standard  are  a  lake  of 
gold  with  inflowing  and  outflowing  streams.  The 
inflow  is  from  miners  and  importers  who  put  their 
gold  not  directly  into  circulation  but  in  the  custody 
of  the  government,  receiving  certificates  which  serve 


SUMMARY  BY  SECTIONS  XXXIX 

in  circulation  as  the  gold's  proxies.  The  outflow  is  to 
jewelers  and  exporters  who  redeem  certificates  and 
withdraw  the  gold.  These  essentials  would  remain 
unchanged,  but  the  terms  for  depositing  and  with- 
drawing gold  would  be  changed. 

8.  Periodical  Variations  of  Weight  Based  on  Index 
Numbers.  The  changes  in  the  dollar's  weight  would 
not  be  left  to  discretion  but  would  obey  the  index 
number  of  prices.  Every  two  months,  say,  this  index 
number  would  be  calculated  representing  what  the 
imaginary  basket  of  goods,  called  the  goods-dollar, 
actually  costs.  If  this  basket  costs  1%,  or  1  cent,  more 
than  a  dollar,  1%  more  gold  is  added  to  the  dollar.  If  it 
costs  1%  less  than  a  dollar,  the  dollar  is  lightened  1%. 

g.  How  the  Adjustment  Rule  Would  Work.  It  is 
not  assumed  that  such  corrections  would  necessarily  be 
complete  or  final.  But,  if  not,  the  next  calculation  of 
the  index  number  would  tell  the  tale  and  further  correc- 
tion would  then  occur.  There  would  always  be  some 
deviation  from  par,  but  it  would  always  be  in  process  of 
correction,  just  as  an  automobile  never  remains  in  the 
exact  direction  desired  but  its  deviation  from  the  true 
path  is  being  corrected  as  fast  as  it  is  made  evident. 
Thus  the  gold  dollar  would  keep  close  to  the  goods- 
dollar  ;  every  other  dollar  (the  paper  dollar  and  the 
deposit  dollar)  being  redeemable,  directly  or  indirectly, 
in  the  gold  dollar,  would  be  equivalent  thereto. 

10.  Proviso  against  Speculation  at  Expense  of  the 
Government.  The  government  would  charge  say  1% 
"  brassage  "  for  deposit  of  gold  and  no  one  change  in 
the  dollar's  weight  would  exceed  that  brassage.  This 
would  prevent  speculation  in  gold  embarrassing  to  the 
Government.  This  proviso  and  other  technical  de- 
tails are  elaborated  in  Appendix  I,  §  1. 


Xl  SUMMARY   BY   SECTIONS 

II.  Comparison  with  Other  Plans.  Attempts  to 
increase  production  are  commendable,  but  neither  these 
nor  price  fixing  can  greatly  affect  the  price  level.  They 
require  repressive  force,  while  stabilizing  the  dollar 
would  be  effortless. 

Chapter  V.     Conclusion 

1.  Summary  of  the  Plan.  Abolish  gold  coin,  re- 
deeming certificates  in  bullion  only ;  establish  an  index 
number ;  adjust  the  dollar's  weight  by  the  deviation 
of  this  index  number  from  par ;  charge  a  "  brassage  " 
fee  and  never  at  any  one  time  alter  the  dollar's  weight 
more  than  that ;  keep  the  gold  standard  system  of 
unrestricted  deposit  and  redemption  and  keep  a  sound 
banking  system. 

2.  The  Crux  of  the  Plan  is  to  keep  the  dollar  from 
shrinking  in  value  by  making  it  grow  in  weight,  or 
vice  versa. 

3.  Artificiality  of  a  Fixed-Weight  Dollar.  At  present 
the  weight  of  the  dollar,  and  so  the  price  of  gold,  is 
fixed.  We  cannot  mark  the  price  of  gold  up  or  down 
when  its  value  goes  up  or  down.  The  result  is  that 
the  prices  of  other  things  rise  when  the  price  of  gold 
ought  to  fall  and  vice  versa. 

4.  Transition  Would  Cause  No  Shock.  If  the  price 
level  chosen  as  the  par  is  near  the  level  existing  when 
the  system  starts,  the  ordinary  man  would  never  notice 
the  change.  The  few,  like  miners  and  jewelers,  who 
handle  gold  bullion  would  simply  notice  that  the  price 
of  gold  was  no  longer  fixed. 

5.  Contract-Keeping  Would  Cease  to  Be  Virtual 
Pocket-Picking,  and  the  discontent,  jealousy,  and  sus- 
picion resulting  therefrom  would  also  cease ;  crises 
and  depressions  would  be  abated. 


SUMMARY  BY   SECTIONS  xli 

6.  Not  a  Cure-Ail.  It  would  not  be  a  substitute  for 
economy  and  efficiency  nor  would  it  insure  a  just  dis- 
tribution of  wealth,  but  it  would  free  these  problems 
from  their  present  entanglement  and  confusion  with 
the  problem  of  a  stable  dollar.  It  would  accomplish 
more  than  any  other  single  reform  and  more  simply. 

7.  No  Claim  to  Theoretical  Perfection.  It  aims 
simply  at  a  practical  improvement  of  the  dollar  Uke 
the  improvements  already  made  in  all  other  units. 

8.  Why  Has  So  Simple  a  Remedy  Been  Over- 
looked. Among  other  reasons,  because  until  recently 
the  index  number  had  not  been  devised.  No  unit  can 
be  standardized  until  it  can  be  measured. 

9.  What  Is  to  Hinder.  Conservatism,  indifference, 
ignorance. 

10.  Precedents.  Contracts  have  been  made  in 
terms  of  other  standards  than  current  money. 

11.  What  Might  Have  Been.  If  we  had  stabiHzed 
the  dollar  forty  years  ago,  we  should  have  escaped, 
during  the  first  half  of  that  period,  the  billions  of  loss 
with  the  bankruptcies  of  farmers  and  business  men  and 
ill-chosen  changes  of  control,  the  crises  of  1884  and  1893, 
much  unemployment,  populism,  sectional  ill-feeling, 
and  the  free  silver  agitation  ;  while  in  the  second  half, 
we  would  have  escaped  the  rising  cost  of  living,  the 
robbing  through  depreciation  of  savings,  bonds,  sal- 
aries, and  wages,  the  food  riots  before  the  war  and 
some  of  them  since,  some  of  the  speculation  and  muck- 
raking, much  *'  profiteering,"  most  of  the  I.  W.  W., 
many  strikes,  the  injustice  to  railways  and  street 
railways. 

12.  What  Is  in  Store.  That  depends  on  which  way 
the  dollar  moves,  which,  in  turn,  depends  on  govern- 


xlii  SUMMARY  BY   SECTIONS 

mental  finance  not  only  here  but  abroad.  We  may 
feel  sure  the  dollar  will  not  stop  fluctuating  unless  we 
stop  it  and  thereby  settle  in  advance  what,  if  neglected 
or  long  delayed,  may  prove  to  be  a  bitter  controversy. 

13.  Our  After- War  Opportunity  is  to  take  the  leader- 
ship in  settling  price  levels  disturbed  by  the  war.  If 
we  do,  the  world  will  probably  follow. 

14.  If  We  Miss  the  Opportunity  to  effect  a  scientific 
remedy  for  our  unstable  dollar,  we  pave  the  way  for 
an  unscientific  remedy,  for  charlatanism,  and  a  great 
selfish  class  struggle. 

Appendix  I.     Technical  Details 

I.  The  Reserve  against  Certificates.  To  increase 
or  decrease  the  weight  of  the  gold  dollar  decreases  or 
increases  in  the  inverse  ratio  the  number  of  dollars 
in  a  given  physical  gold  reserve  and  would  therefore 
disturb,  in  one  direction  or  the  other,  the  present  100% 
ratio  of  gold  reserve  to  gold  certificates.  The  ratio 
may  be  kept  at  100%  or  any  other  fixed  figure  by  can- 
celing or  issuing  certificates  for  that  purpose. 

These  operations  would  help  stabilization,  i.e.  would 
require  less  change  in  the  dollar's  weight  than  would 
otherwise  be  necessary. 

They  also  put  an  item  of  loss  or  gain  on  the  Govern- 
ment's books  which  would  otherwise  belong  to  private 
individuals. 

Another  way  to  treat  the  reserve  is  merely  to  let 
the  ratio  of  reserve  to  certificates  alone  unless  or  until 
the  reserve  should  sink  to  a  set  minimum  limit  of 
safety,  say  50%,  after  which  it  could  be  safeguarded 
in  the  manner  above  described. 

Still  another  way  is  to  apply  such  a  limit  at  the  out- 


SUMMARY  BY  SECTIONS  xliii 

set,  the  Government  then  appropriating  the  surplus 
above  this  legal  reserve  as  initial  profit  and  afterward 
maintaining  the  fixed  ratio  in  the  manner  described. 

As  long  as  the  reserve  is  left  to  drift,  the  operation  of 
the  stabilization  system  would  consist  chiefly  in  affect- 
ing the  export  or  import  of  gold.  When  the  additional 
feature  of  withdrawing  or  issuing  certificates  is  added, 
the  operation  of  the  system  would  consist  chiefly  in 
affecting  the  volume  of  these  certificates  within  the 
country. 

If  the  country  or  countries  employing  the  system 
were  a  small  part  of  the  world,  the  changes  required 
in  the  dollar's  weight  would  not  be  appreciably  dif- 
ferent whether  or  not  the  feature  of  special  withdrawal 
and  issue  of  certificates  to  keep  the  reserve  ratio  definite 
is  introduced  or  not.  But  if  the  countries  employing 
the  system  included  most  of  the  world,  the  first,  or 
indefinite  reserve  system,  would  require  much  more 
change  in  the  dollar's  weight  to  effect  stabilization 
than  would  the  second,  or  definite,  reserve  system. 

2.  Speculation  in  Gold.  At  present  the  Govern- 
ment, unlike  a  merchant,  buys  and  sells  gold  at  one 
and  the  same  price.  If  this  practice  were  continued 
after  the  stabilization  system  was  adopted,  the  Govern- 
ment might  be  embarrassed  whenever  a  prospective 
change  in  the  price  of  gold  became  known  by  specu- 
lators. They  might  buy  gold  of  the  Government 
to-day  at  one  price  and  sell  it  back  to  the  Government 
to-morrow  at  a  higher  price  or  sell  it  to-day  and  buy  it 
back  to-morrow  at  a  lower  price.  These  operations 
can  be  avoided  by  inserting  a  Government  commission 
fee,  as  it  were  {"  brassage  ")  of  say  1%  between  the 
prices  at  which  the  Government  buys  and  sells  and 


xliv  SUMMARY  BY   SECTIONS 

never,  at  any  one  time,  shifting  this  pair  of  prices  up- 
ward or  downward  by  more  than  that  fee. 

Other  forms  of  speculation  would  not  do  harm. 

3.  Selection  of  the  Index  Number.  A  weighted 
arithmetical  index  number  for  wholesale  prices  of  com- 
modities should  be  used.  Wholesale  prices  are  more 
prompt  to  indicate  what  change  in  the  dollar's  weight 
is  needed  than  retail  prices.  The  frequency  of  calcu- 
lation should  probably  be  about  once  every  two  months 
to  afford  full  time  for  the  lag  between  the  previous 
adjustment  and  its  effect. 

4.  Selection  of  the  Par.  This  should  be  left  to  a 
judicial  commission.  Probably  we  should  start  off  the 
system  at  a  price  level  near  that  existing  at  the  time. 

5.  What  Shall  Be  Done  with  Existing  Gold  Coins. 
One  answer  is  (while  stopping  any  further  coinage)  to 
allow  existing  coins  to  continue  in  circulation  unless 
or  until  their  owners  choose  to  exchange  them  for 
certificates  or  melt  them  into  bullion  (if  gold  should 
appreciate  enough  to  render  such  melting  profit- 
able). 

6.  What  Shall  Be  Done  Concerning  the  "  Gold 
Clause "  in  Existing  Contracts.  The  best  way  to 
carry  out  its  real  purpose,  which  was  stabilization,  is  to 
abrogate  it.  This  the  Federal  Government  has  the 
constitutional  power  to  do. 

7.  Bank  Credit  and  the  Plan.  Bank  reserves  would 
be  kept  in  gold  bullion  dollar  certificates,  the  paper 
representatives  of  gold.  The  banks'  own  notes  and 
deposits  should,  of  course,  be  kept  in  some  reasonable 
relation  to  their  reserve.  One  means  of  accomphshing 
this  is  the  adjustment  of  the  rate  of  discount.  This 
is  the  means  used  by  the  Bank  of  England. 


SUMMARY  BY  SECTIONS  xlv 

8.  International  Aspects  of  the  Plan.  The  plan 
does  not  require  concerted  action  of  nations,  though 
concerted  action  would  be  desirable  (to  avoid  the  in- 
conveniences of  fluctuating  ratios  of  exchange).  The 
nations  employing  the  plan  would  no  longer  have  their 
monetary  standards  at  the  mercy  of  foreign  politics 
or  wars.  International  trade  would  not  be  greatly 
affected  whether  one  or  many  nations  adopted  the 
plan.  The  great  advantages,  especially  as  to  inter- 
nal trade,  enjoyed  by  any  nation  first  adopting 
the  plan  would  probably  lead  soon  to  its  universal 
adoption. 

9.  Numerical  Illustrations  under  Various  Assump- 
tions. Actual  calculations  show  that  it  makes  sur- 
prisingly little  difference  to  the  resulting  stabilized 
index  number  what  brassage  charge,  what  frequency 
of  adjustment,  and  what  adjustment  of  the  dollar's 
weight  for  each  1%  deviation  from  par  of  the  index 
number  are  decided  on  so  long  as  these  are  kept  within 
reasonable  limits.  Nor,  with  the  same  proviso,  does 
it  make  much  difference  what  may  be  the  amount  and 
promptness  of  the  influence  which  a  given  adjustment 
is  assumed  to  exert,  nor  what  may  be  the  tendency  of 
the  index  number  which  the  stabilization  device  is 
designed  to  overcome. 

Thus,  if  stabilization  had  been  started  in  1900  with 
an  adjustment  every  other  month  of  1%  of  the  dollar's 
weight  for  every  1%  of  deviation  from  par  of  the  in- 
dex number  and  with  a  brassage  charge  of  1%,  and 
if  we  assume  that  the  influence  on  the  index  number 
is  1%  for  each  1%  of  adjustment,  and  that  two  thirds 
of  this  influence  occurs  before  the  next  adjustment 
and  the  other  third  before  the  next  following  one  — 


xlvi  SUMMARY  BY  SECTIONS 

conditions  constituting  a  very  severe  test  —  we  find 
that,  up  to  the  fall  of  1915,  when  the  European  war 
first  greatly  affected  our  price  level,  the  stabilization 
machinery,  working  as  above  assumed,  would  have 
kept  the  index  number  within  2%  of  par  two  thirds  of 
the  time,  within  3%  of  par  six  sevenths  of  the  time, 
and  within  4%  of  par  all  of  the  time. 

10.  A  Tentative  Draft  of  an  Act  to  Stabilize  the 
Dollar.  A  dollar  is  defined  as  a  variable  quantity 
of  standard  gold  buUion  of  approximately  constant 
computed  purchasing  power. 

A  Computing  Bureau  is  to  compute  every  second 
month  a  weighted  index  number  of  wholesale  prices 
of  about  100  important  commodities. 

The  result  of  this  computation  is  to  be  transmitted 
to  the  Bureau  of  the  Mint,  which  thereupon  increases 
or  decreases  the  dollar's  weight  in  the  ratio  which  the 
index  number  bears  to  par  (but  not  by  more  than  1%, 
the  brassage  fee). 

The  Mint  is  to  redeem  gold  buUion  dollar  certificates 
ad  libitum,  dollar  for  dollar,  in  gold  bullion  and  hke- 
wise  issue  them  for  gold  bullion  deposited,  dollar  for 
dollar,  but  charging  in  addition  1%  brassage. 

The  Secretary  of  the  Treasury  is  to  maintain  the 
gold  reserve  against  certificates  at  50%.  Any  surplus 
above  this  50%  reserve  requires  an  issue  of  certificates 
and  any  deficiency  requires  a  cancellation  of  certifi- 
cates. 

Appendix  II.     Disapproval  of  the  Plan 

I.  Misunderstandings  are  natural  and  numerous. 
They  make  up  most  of  the  supposed  objections  to  the 
plan.     (Figure  13.) 


SUMMARY  BY  SECTIONS  xlvii 

2.  Alleged  Defects.  It  is  a  weak  objection  that 
the  plan  is  not  perfect ;  we  know  our  present  system 
is  much  further  from  perfection. 

3.  The  Obstacle  of  Conservatism  is  the  only  for- 
midable one  and  it  underlies  most  other  ^objections 
alleged. 

4.  The  Obstacle  of  Special  Interests  seems  prac- 
tically non-existent. 

Appendix  III.     Alternative  Plans 

1.  A  Sound  Alternative  is  to  dispense  with  gold  as 
an  intermediary  and  to  provide  virtually  for  the  free 
deposit  and  withdrawal  of  composite  goods-dollars  in 
exchange  for  the  issue  and  redemption  of  certificates. 
These  operations  are  made  possible  by  means  of  a 
system  of  goods-warrants  for  each  special  kind  of 
goods. 

2.  The  Same  System  Modified  by  the  Omission  'of 
**  Free  Coinage  "  {i.e.  free  deposit)  could  theoretically 
be  worked. 

3.  The  Same  System  Modified  by  the  Omission  of 
Redemption  would  be  exposed  to  the  risk  of  inflation. 

4.  A  Money  Based  on  Labor  is  conceivable  but  not 
desirable. 

5.  Governmental  Control  of  Gold  Production  would 
help. 

6.  The  Tabular  Standard  is  practicable  only  in  a 
Umited  way. 

Appendix  IV.     Public  Interest 

I.  Either  an  Upheaval  or  a  Collapse  of  Prices 
Weakens  Confidence  in  Money  and  arouses  public 
curiosity  as  to  the  ''  reason  why."     Great  wars  usually 


xlviii  SUMMARY  BY  SECTIONS 

cause  great  price  upheavals  through  inflation  and  so 
lead  to  discussion  as  to  causes  and  cures. 

The  tendency,  at  such  times,  to  suspect  the  stability 
of  money  encounters,  however,  the  ingrained  faith  in 
that  stability ;  so  that  after  the  price  movement  slows 
down  the  public  soon  relapses  into  its  old  childhke 
confidence  that  ''  a  dollar  is  a  dollar." 

It  is  at  the  end  of  a  long  swing  of  prices  that  the 
public  interest  and  openmindedness  is  at  a  maximum. 
This  was  true  in  1896  after  a  prolonged  fall  of  prices 
and  it  is  probably  about  to  be  true  to-day  after  a  pro- 
longed rise  of  prices. 

2.  The  Present  Plan  Grew  Out  of  the  Price  Move- 
ment Beginning  in  1896.  It  was  not  till  prices  had 
been  rising  five  or  ten  years  after  1896  that  the  move- 
ment attracted  attention.  Then  articles,  books,  and 
official  reports  on  the  High  Cost  of  Living  came 
in  quick  succession  and  increasing  numbers.  A  project 
to  hold  an  international  conference  on  the  subject  was 
in  progress  when  the  Great  War  broke  out.  One  of 
the  special  objects  of  this  proposed  conference  was  to 
study  the  role  of  money  in  the  High  Cost  of  Living. 

3.  Approval  of  the  Plan  for  Stabilizing  the  Dollar 
has  been  expressed  by  economists,  bankers,  business 
men,  and  men  in  public  life.  Resolutions  favoring  it 
have  been  passed  by  chambers  of  commerce  and  other 
commercial  bodies.  Its  actual  adoption  is  now  being 
considered  in  some  countries. 

Appendix  V.     Precedents 

1.  Contracts  in  Terms  of  a  Commodity,  such  as 
wheat  or  steel,  in  preference  to  current  money,  have 
sometimes  been  drawn. 

2.  The  Tabular  Standard.     Contracts  in  terms  of  a 


SUMMARY  BY  SECTIONS  xlix 

composite  or  index  number  of  goods  have  been  drawn, 
notably  in  the  colony  of  Massachusetts,  to  safeguard 
the  pay  of  soldiers  and,  in  the  present  war,  to  safe- 
guard wages. 

3.  Correcting  the  Money  Unit  Itself,  as  in  the  "  gold 
exchange  standard,"  has  been  adopted  to  prevent 
fluctuations  in  international  exchange.  During  the 
Great  War  prohibition  of  gold  imports  or  exports  was 
sometimes  adopted,  the  purpose  being,  in  part  at  least, 
to  prevent  undue  inflation  or  contraction. 

4.  Conclusion.  There  is,  thus,  precedent  for  each 
of  the  elements  of  the  proposal.  The  only  innovation 
is  combining  these  previously  tested  elements  into  one 
complete  whole. 

Appendix  VI.     Bibliography 

1.  Some   of    the    Chief    Index    Numbers    Current 

include  six  for  the  United  States,  two  for  Canada,  four 
for  Great  Britain,  one  for  France. 

2.  Some  of  the  Chief  Writings  on  the  Principles  of 
Index  Numbers  include  those  of  Jevons,  Edgeworth, 
Walsh,  Knibbs,  Fisher,  and  Mitchell. 

3.  Remote  Anticipations  of  the  Plan  to  Stabilize 
the  Dollar  include  bimetallism,  symmetallism,  the  gold 
exchange  standard,  paper  money  regimes,  and  the 
tabular  standard. 

4.  Direct  Anticipations,  being  substantially  plans 
identical  in  concept  with  that  of  this  book,  have  been 
made  as  early  as  1824  by  John  Rooke,  and  during  the 
last  era  of  falling  prices  by  Simon  Newcomb,  Alfred 
Marshall,  Aneurin  Williams,  J.  Allen  Smith,  and  D.  J. 
Tinnes  as  well  as  by  several  others  mentioned  in  the 
Preface,  who  have  not  published  their  views. 

5.  Recent  Writings  on  Stabilizing  the  Dollar  are  cited. 


STABILIZING  THE  DOLLAR 

CHAPTER  I 

THE    FACTS 

I.   Index  Numbers 

This  book  aims  to  show  how  prices  in  general  can 
be  controlled. 

A  great  teacher  once  said  to  his  students :  "  Divide 
the  study  of  any  social  situation  into  four  questions: 
What  is  it?  Why  is  it?  What  of  it?  What  are 
you  going  to  do  about  it?  "  Accordingly  I  shall  take 
up,  in  successive  chapters,  (1)  the  actual  facts  to  be 
explained ;  (2)  the  chief  causes  which  explain  them ; 
(3)  the  resultant  evils  which  make  a  remedy  desirable ; 
and  (4)  the  remedy. 

The  present  chapter  is  devoted  to  the  first  of  these 
four  topics  —  the  facts,  as  shown  by  the  recorded  price 
movements  of  history.^ 

The  prices  of  various  articles  do  not  usually  move 
together  but  scatter  or  disperse  like  the  fragments  of  a 
bursting  shell.  Yet  there  is  always  a  definite  average 
movement  just  as  there  is  a  definite  path  of  the  center 
of  gravity  of  the  shell-fragments. 

In  order  to  depict  the  average  movement  of  prices  we 
must  first  have  some  way  to  measure  it.  A  very  simple 
measure  has  been  devised,  called  the  "  Index  Number." 

1  The  reader  who  wishes  fuller  details  is  referred  to  the  bibliog- 
raphies given  in  Appendix  VI. 

B  1 


2  STABILIZING  THE  DOLLAR  [Chap.  I 

An  index  number  is  a  number  showing  the  average 
rise  or  fall  of  prices.  Thus,  if  wheat  has  risen  4% 
since  last  month  while  beef  has  risen  10%,  the  average 
rise  of  wheat  and  beef  is  midway  between  4%  and 

10%,    or    7%    {i.e.   ^il0  =  7).     Then   107%  is  the 

''  index  number  "  for  the  prices  of  the  two  articles 
this  month,  on  the  basis  of  last  month's  prices  taken  as 
100%.     Or : 

Last  Month  Called     This  Month 

wheat        100%  104% 

beef  100% 110% 

average 100%  107% 

The  same  method  applies,  of  course,  to  more  than 
two  prices.     Thus,  if  three  such  prices  rise  respectively 

4%,  4%  and  10%,  their  average  rise  is or 

o 

6%  and  the  "  index  number  "  is  106  as  compared  with 
the  original  price  level  of  100,  taken  as  a  base  of  com- 
parison. 

Such  a  calculation  treats  the  commodities  as  equally 
important.  If  one  commodity  is  more  important  than 
another,  and  we  wish  to  be  very  particular,  we  may 
treat  the  more  important  commodity  as  the  equivalent 
of  two  or  three  other  commodities.  Thus,  suppose 
that  wheat  is  twice  as  important  as  beef.  If  wheat 
rises  4%  and  beef  10%  the  average  rise  of  the  two 

together,  instead  of  being  — - —  =  7,  as  it  would  be  if 

the  commodities  were  regarded  as  equal,  is =  6 

just  as  though  there  were  three  commodities,  thus 
making  the  index  number  106  instead  of  107.     This 


Sec.  1] 


THE  FACTS 


is  known  as  a  "  weighted  "  average.  If,  reversely, 
beef  is  "  weighted  "  twice  as  much  as  wheat,  the  average 

rise  is  =  8   and   the  index  number  is  108. 

o 

It  \vill  be  noted  that  there  is  remarkably  little  difference 
between  the  ''  weighted  "  averages  on  the  one  hand 
(106  and  108),  and  the  "  unweighted  "  average  (107) 
on  the  other.  Such  is  usually  the  case.  Figure  1  illus- 
trates this  important  fact.     Nor  does  it  generally  make 


Fig.  I.    Price  Movements  as  Calculated  by  Different  Methods 
(after  Wesley  Clair  Mitchell) 

Showing  how  very  closely  the  "weighted"  and  "unweighted"  methods  of 
averaging  agree  with  each  other.  That  is,  the  percentage  by  which  the 
level  of  wholesale  prices  in  the  United  States  has  changed  between  any  two 
dates  is  found  to  be  about  the  same  whether  that  percentage  is  calculated 
"unweighted,"  i.e.  as  a  simple  average  of  the  percentages  by  which  the 
various  commodities  have  changed  in  price,  all  of  them  being  treated  alike, 
or  "weighted,"  i.e.  with  careful  regard  to  the  relative  importance  of  each 
commodity.  Thus,  between  1896  and  1914  the  "weighted"  index  number 
rose  from  67  to  100,  and  the  "vmweighted"  from  90  to  133,  The  two  rises 
are  almost  identical,  -^f-  being  almost  the  same  as  -/j*. 

{The  curves  in  this,  and  the  other, diagrams  in  this  book  are  plotted  on  the  "ratio  chart" 
in  which  the  vertical  scale  is  so  arranged  that  the  same  slope  always  represents  the  same 
percentage  rise.) 


much  difference  whether  very  many  or  only  a  moderate 
number  of  commodities  are  included.  Figure  2  illus- 
trates this  fact. 

On  the  whole,  the  best  form  of  index  number  is  that 
expressing  the  price  of  a  given  bill  of  goods.     If  a  defi- 


STABILIZING  THE   DOLLAR 


[Chap.  I 


nite  assortment  of  goods  cost  $1.00  at  one  date  and  SI.  10 
at  another  date,  these  figures  may  be  regarded  as  index 


Fig.  2.     Price  Movements  as  Calculated  by  Using  Different  Num- 
bers of  Commodities  (eifter  Wesley  Clair  Mitchell) 

Showing  that  the  percentage  rise  or  fall  of  the  level  of  wholesale  prices  in 
the  United  States  is  very  much  the  same  whether  many  or  few  commodities 
are  included  in  the  calculations. 

numbers.  Thus  the  price  from  time  to  time  of  an  im- 
aginary market  basket  containing  a  representative  col- 
lection of  goods,  e.g.  one  pound  of  meat,  one  pound  of 
sugar,  one  pint  of  milk,  etc.,  may  be  considered  the 
index  number  and  is  so  considered  in  Chapter  IV. 

Various  systems  of  index  numbers  are  now  before 
the  public,  —  such  as  those  of  Bradstreet,  Dun,  Gibson, 
the  Annalist,  the  United  States  Bureau  of  Labor  Sta- 
tistics, the  Canadian  Department  of  Labour,  the  Lon- 
don Economist,  the  London  Statist,  and  the  British 
Board  of  Trade. 

The  present  index  number  of  the  United  States 
Bureau  of  Labor  Statistics,  as  perfected  by  the  present 
Chief  of  the  Bureau,  Dr.  Royal  Meeker,  is  made  up 
from  the  wholesale  prices  of  300  commodities.  It  gives 
more  weight  to  the  more  important  commodities,  as 
measured  by  the  amounts  marketed  in  the  last  census 
year.     It  expresses  the  price  level  of  1914  by  the  index 


Sec.  2]  THE   FACTS  5 

number  100  as  compared  with  the  price  level  of  1913 
taken  as  100.  In  other  words  it  shows  that,  as  between 
1913  and  1914,  prices  averaged  the  same.  The  index 
number  for  1917  was  176,  and  that  for  1918,  196.  That 
is,  the  prices  in  1917  were,  on  the  average,  76%  higher 
than  those  of  1913,  and  in  1918,  96%  higher,  and  conse- 
quently the  prices  of  1918  were,  on  the  average,  higher 
than  those  of  1917  in  the  ratio  of  196  to  176. 

Index  numbers  are  a  comparatively  modern  inven- 
tion. Not  many  good  ones  have  been  calculated  back 
of  1890,  and  still  fewer  back  of  1860.  Jevons,  the  Eng- 
lish economist,  who,  more  than  any  other  man,  was 
responsible  for  introducing  the  idea,  computed  an  index 
number  for  England  back  to  1782.  A  few  very  rough 
index  numbers  have  been  computed  back  to  the  thir- 
teenth century,  and  one,  with  some  breaks,  back  even 
to  the  eighth  century. 

2.   Medieval  Price  Levels 

It  is  an  interesting  fact  that,  throughout  the  ages, 
while  prices  have  sometimes  fallen,  they  have  generally 
risen.  In  France  prices  just  before  the  war  were  four 
to  six  times  as  high  as  five  hundred  years  ago  and  five 
to  ten  times  as  high  as  a  thousand  years  ago. 

We  moderns  are  not  the  only  ones  to  complain  of  the 
"  high  cost  of  living."  In  the  sixteenth  century  people 
were  complaining  that  wheat  cost  from  three  to  ten 
times  what  it  cost  during  the  three  preceding  centu- 
ries. We  are  told  that  in  1447  £5  bought  as  much  as 
£28  or  £30  would  buy  in  1707.  These  fluctuations 
of  prices  are  expressed  in  terms  of  metallic  money. 
Where  irredeemable  paper  money  has  been  used,  the 


6  STABILIZING  THE  DOLLAR  [Chap.  I 

fluctuations  have  been  far  greater,  as,  for  instance, 
in  the  case  of  the  famous  assignats  of  the  French 
Revolution,  and  the  "  Continental  "  paper  money 
of  our  own  Revolution  and  the  present  paper  money 
of  Russia.  After  the  American  Revolution  a  barber 
in  Philadelphia  is  said  to  have  covered  the  walls 
of  his  shop  with  Continental  paper  money,  calling 
it  the  cheapest  wall  paper  he  could  get !  Jokes  were 
also  heard  of  a  housewife  taking  a  market  basket 
full  of  this  "  money  "  to  the  butcher's  shop  and  bring- 
ing home  the  meat  in  her  purse !  This  money  be- 
came a  hissing  and  a  byword ;  and,  even  to  this  day, 
one  of  the  favorite  expressions  for  worthlessness  is  "  not 
worth  a  Continental." 


3.  A  Century  and  a  Quarter  of  Price  Move- 
ments before  the  Great  War 

But  we  have  no  really  good  measure  of  price  move- 
ments before  1782,  the  date  from  which  Jevons  begins 
his  system  of  index  numbers  for  wholesale  prices  in 
England. 

Between  1789  and  1809  Jevons'  index  number  rose 
from  85  to  161.  That  is,  in  twenty  years,  according 
to  Jevons,  English  prices  practically  doubled. 

Between  1809  and  1849  Jevons'  index  number  fell 
from  161  to  64.  That  is,  in  these  forty  years,  accord- 
ing to  Jevons'  number,  English  prices  were  reduced 
by  more  than  one  half. 

Between  1849  and  1873,  English  prices,  as  measured 
by  Sauerbeck's  index  number,  rose  (with  two  interrup- 
tions) from  74  to   111. 

Figure  3  exhibits  these  movements  as  well  as  those 


Sec.  3] 


THE    FACTS 


for    the   United    States. 
We  note  the   great   va- 
riabiUty    of    the    curves. 
Very  seldom  do  they  run 
horizontally.      Occasion- 
ally, even  in  peace  times, 
there  is   a   variation    of 
over  10%  within  a  year. 
Between   1873   and 
1896,  in  countries  using 
the  gold  standard,  prices 
fell;   while    in  countries 
using  the  silver  standard, 
they  rose.     In  the  United 
States  the  fall  was  aggra- 
vated by  the  necessity  of 
getting    back    from    the 
paper    standard   of    the 
Civil   War   to   the    gold 
standard.      Prices   fell 
from  an  index  number  of 
100  in  1873  to  51  in  1896, 
when    the    cumulative 
downward  movement  re- 
sulted, politically,  in  the 
famous  Bryan  campaign. 
But,  by  the  irony  of 
fate,    scarcely    had    the 
country  become   excited 
over  falling  prices  when 
the  movement  turned  up- 
ward  again;    and,    with 
few    exceptions,    it    has 


8  STABILIZING  THE   DOLLAR  [Chap.  I 

been  upward  until  to-day.  Between  1896  and  1914  be- 
fore the  outbreak  of  war,  the  index  number  of  the 
United  States  Bureau  of  Labor  Statistics  shows  a  rise 
of  about  50%.  Substantially  the  same  rise  occurred 
in  Canada ;  while  in  the  United  Kingdom  there  was  a 
rise  of  35%. 


4.  Price  Movements  during  the  Great  War 

In  the  still  further  and  more  recent  rise  of  prices  the 
Great  War  has  been  the  dominant  factor.  Its  first 
effect  was  a  speculative  rise.  Sudden  and  arbitrary 
speculative  ^'  mark-ups  "  of  prices  usually  accompany 
war,  and  the  mark-up  in  1914,  like  most  others,  was 
temporary.  It  reached  its  maximum  in  the  United 
States  in  September,  1914.  As  soon  as  it  became  clear 
that  market  conditions  would  not  justify  it  (and  this 
became  clear  after  about  a  month)  speculators  were 
forced  to  reduce  prices  again  and,  until  near  the  close 
of  1915,  no  great  rise  in  prices  occurred  in  the  United 
States.  From  the  close  of  1915,  however,  the  rise  has 
been  far  more  rapid  than  before.  The  rise  of  wholesale 
prices  before  the  war,  between  1896  and  1914,  great  as 
it  was,  amounted,  in  the  aggregate,  in  the  United  States 
to  only  i  of  1%  per  month,  and  in  England,  to  still  less  ; 
whereas,  during  the  war,  the  rise  amounted  to  1^% 
per  month  in  the  United  States,  and  to  much  more  in 
many  other  countries  —  in  Germany  and  Austria,  to 
3%  per  month,  and  in  Russia,  apparently,  to  4%  or 
5%  per  month. 

To  these  German  and  Russian  rates  there  is  no  par- 
allel among  the  records  of  index  numbers  which  have 
been  computed.     If  before  the  war  we  could  become 


Sec.  4]  THE    FACTS  9 

excited  over  a  continued  average  up-grade  of  |  of  1% 
per  month,  we  may  partially  understand  some  of  the 
Russian  economic  unrest  with  an  uphill  movement  more 
than  twenty  times  as  steep  and  probably  still  steeper 
under  Bolshevism. 

As  yet  the  evidence  is  not  all  in,  but  the  index  number 
of  wholesale  prices  of  our  Bureau  of  Labor  rose  106% 
between  1914  before  the  war  and  November,  1918,  the 
month  of  the  armistice,  while  the  index  number  of  the 
London  Statist  rose  122%. 

Retail  prices  of  food  rose  in  the  United  States  in  the 
same  period  79%,  in  England  133%,  in  France  approx- 
imately 140%,  etc.  It  is  fair  to  say  that  the  war 
doubled  prices  in  the  United  States  and  Canada  and 
more  than  trebled  them  in  western  Europe, ^  while  in 
Russia  it  multiplied  them  by  ten  or  twenty  or  more. 
The  result  is  that  the  problem  of  the  price  level  is, 
throughout  the  world,  perhaps  the  greatest  economic 
problem  which  the  war  has  left. 

The  general  level  of  prices  in  the  United  States  is 
now  almost  threefold  the  level  of  1896.  Expressing 
the  same  fact  in  terms  of  the  purchasing  power  of 
money,  our  dollar  of  to-day  is  worth  only  thirty-five 
cents  of  the  money  of  1896.  In  modern  slang  we 
may  say  almost  literally,  that,  as  compared  with  the 
biggest  dollar  we  ever  had,  that  of  1896,  our  present 
dollar  "  looks  like  thirty  cents." 

^  From  the  fragmentary  data  available  for  Germany,  it  would 
seem  that  the  official  retail  prices  of  food  rose  about  two  and  one  half- 
fold  during  the  war  and  unofficial,  i.e.  illicit  or  "unter  der  Hand," 
prices  rose  about  tenfold. 


CHAPTER  II 

THE   CAUSES 

I.  False  Scents 

We  have  answered  the  first  of  the  four  questions 
and  have  seen  that  the  price  level  is  always  changing, 
that  is,  that  the  dollar  is  not  a  constant  unit  of  pur- 
chasing power  or  value  in  exchange. 

We  are  now  ready  for  the  second  of  the  questions, 
i.e.  "  Why  is  it  not  constant?  " 

In  recent  popular  discussions  a  great  variety  of 
reasons  have  been  assigned  for  the  "  high  cost  of 
living,"  e.g.,  "profiteering";  speculation;  hoarding; 
the  middleman ;  foreign  demand ;  the  war ;  labor 
unions  ;  short  hours  of  labor  and  limitation  of  output ; 
trusts  ;  patent  monopolies ;  the  tariff ;  cold  storage ; 
longer  hauls  on  railroads ;  marketing  by  telephone ; 
the  free  delivery  system ;  the  individual  package ;  the 
enforcement  of  sanitary  laws  ;  the  tuberculin  testing  of 
cattle  ;  the  destruction  of  tainted  meat ;  sanitary  milk ; 
the  elimination  of  renovated  butter  and  of  "  rots  "  and 
"  spots  "  in  eggs  ;  food  adulteration  ;  advertising  ;  un- 
scientific management ;  extravagance ;  higher  standards 
of  living ;  the  increasing  cost  of  government ;  the  in- 
creasing cost  of  old-age  pensions,  and  of  better  pauper 
institutions,  hospitals,  insane  asylums,  reformatories, 
jails  and  other  pubhc  institutions ;  the  increasing  cost 
of  insurance  against  accident  and  disease ;  the  increas- 

10 


Sec.  1]  THE   CAUSES  11 

ing  burden  of  unemployment  and  crime ;  investments 
in  public  undertakings,  such  as  railways,  public  works, 
etc. ;  the  growing  cost  of  military  establishments,  both 
before  and  during  the  Great  War;  the  destruction  of 
wealth  by  war ;  the  withdrawal  of  labor  to  war ;  the 
concentration  of  population  in  cities ;  the  high  price  of 
land ;  private  ownership  of  land  and  other  natural  re- 
sources ;  impoverishment  of  the  soil ;  the  displace- 
ment of  the  near-by  farmer  as  the  chief  source  of  food 
supply ;  the  fact  that  farmers'  wives  no  longer  com- 
pete with  large  establishments  in  butter  making  or 
poultry  raising ;  drought ;  hoarding  by  housewives ; 
daily  purchases  by  housewives  and  their  abandon- 
ment of  home  storage  in  attic,  smokeroom,  and  cold 
cellar. 

I  shall  not  discuss  in  detail  this  list  of  alleged  ex- 
planations. While  some  of  them  are  important  factors 
in  raising  particular  prices,  none  of  them  except  the 
war  has  been  important  in  raising  the  general  scale 
of  prices,  and  the  war,  of  course,  only  recently.  If 
other  causes  seem  to  the  reader  to  deserve  special  dis- 
cussion beyond  the  brief  summary  which  follows,  I 
would  refer  him  to  my  previous  writings  ^  and  to  the 
writings  of  others. 

That  none  of  the  ingenious  explanations  enumerated 
go  far  to  account  for  so  general,  or  universal,  a  change 
of  prices  is  fairly  clear  when  we  consider  that  the  rise, 
before  the  war,  applied  to  producers'  prices  as  well  as 
to  consumers',  to  wholesalers'  prices  as  well  as  to  re- 
tailers', to  prices  of  competitive  goods  as  well  as  to 

'  See,  in  particular,  Whxj  is  the  Dollar  Shrinking  ?  Macmillan, 
1914 ;  and  The  New  Price  Revolution,  Department  of  Labor,  In- 
formation and  Education  Service,  March,  1919. 


12  STABILIZING  THE  DOLLAR  [Chap.  II 

those  of  trust-controlled  and  patented  goods,  to 
prices  in  free-trade  countries  as  well  as  to  those  in 
countries  having  a  protective  tariff,  to  prices  in  coun- 
tries without  labor  unions  as  well  as  to  those  in  coun- 
tries with  them,  to  prices  of  necessities  as  well  as  to 
those  of  luxuries,  to  prices  of  unadvertised  goods  as 
well  as  to  those  of  advertised  goods,  to  prices  in  non- 
militaristic  nations  as  well  as  to  those  in  militaristic  na- 
tions, to  prices  in  the  country  as  well  as  to  those  in  the 
city,  to  prices  where  sanitary  laws  were  absent  as  well 
as  to  those  where  they  were  present,  to  prices  of  bulk 
goods  as  well  as  to  those  of  package  goods. 

I  do  not  mean  that  the  above  suggested  causes  had 
no  influence  on  prices.  The  prices  in  free-trade  coun- 
tries seem  to  rise  (or  fall)  —  or  did  before  the  war  — 
somewhat  less  than  in  other  countries ;  prices  of  pro- 
prietary breakfast  cereals  are  far  above  the  prices  of 
the  materials  of  which  they  are  made ;  trade  unions 
have  added  to  costs  in  many  industries ;  middlemen 
have  sometimes  combined  to  depress  the  prices  of 
truck  to  farmers,  while  increasing  the  prices  to  con- 
sumers ;  trusts  have  sometimes  raised  prices  above 
competitive  levels,  although  they  have  sometimes  re- 
duced them  and  made  their  monopoly-profits  by  still 
further  reducing  costs  through  the  economies  of  trust- 
organization  ^ ;  and  war-time  prices  rose  more  in  coun- 
tries near  the  seat  of  war  than  in  those  remote.  But 
interesting  and  important  as  are  these  facts,  they  do 
not  go  far  in  helping  us  understand  the  cause  of  high 
prices. 

1  Prof.  Meade  (in  Journal  of  Political  Economy,  April,  1912),  shows 
by  index  numbers  that  trust-made  products  have  been  more  stable  and,. 
on  the  whole,  have  been  less  inclined  to  rise  than  competitive  products. 


Sec.  2]  THE  CAUSES  13 

2.   Profiteers,    Speculators,    and   Middlemen 

Much  is  said  to-day  of  profiteering  and  of  specu- 
lation in  general.  Speculation  is  always  stimulated 
when  prices  are  changing.  It  feeds  on  price  move- 
ments. Thus  when  prices  are  expected  to  rise  in  the 
future,  speculators  buy  goods  and  raise  their  prices  in 
the  present ;  and  when,  in  the  future,  they  sell  their 
holdings,  prices  are  kept  helow  what  they  would  other- 
wise have  been.  The  normal  effect  of  such,  as  of 
most,  speculation  is  to  reduce  or  "  even-up  "  price 
fluctuations. 

Occasionally  speculation  causes  or  aggravates  fluc- 
tuations ;  but,  in  such  cases,  speculators  usually  come 
to  grief  as  a  consequence.  This  was  true  of  the  specu- 
lative rise  in  prices  that  occurred  immediately  at  the 
outbreak  of  the  war,  in  August,  1914,  and  was  promptly 
followed  by  a  fall.  Speculators  who  thus  try  artifi- 
cially to  mark  up  prices  when  other  causes  are  not 
about  to  produce  a  rise  are  like  the  comedian  who  said 
he  could  "  command  $1000  every  night "  but  added, 
"  the  only  trouble  is  it  won't  come  !  " 

Similarly  cold  storage  is  a  stabilizer  of  prices  and,  on 
the  whole,  has  probably  mitigated  the  rise  of  prices  in- 
stead of  aggravating  it.^  Equally  far  from  the  truth 
is  the  popular  idea  that  the  rise  of  prices  is  due  to  "  the 
middleman."  It  is  true  that  the  processes  of  distribu- 
tion are  often  wasteful,  but  probably  they  have,  on 
the  whole,  been  growing  less  wasteful  rather  than  more 
wasteful.  Index  numbers  show  that  the  average  mar- 
gins between  wholesale  and  retail  prices  have,  on  the 
whole,  actually  diminished  during  most  of  the  rise  in 

^  See  Fabian  Franklin,  Cost  of  Living,  p.  97. 


14 


STABILIZING  THE   DOLLAR 


[Chap.  II 


prices  since  1896,  while  they  tended  to  increase  when 
prices  were  falling  before  1896.  In  other  words,  whole- 
sale prices  move  faster,  in  either  direction,  than  re- 
tail prices.     Figure  4  illustrates  this  fact,  and  more 


Fig.  4.     Movements  of  Retail  and  Wholesale  Prices 
(after  Wesley  Clair  Mitchell) 

Showing  :  (1)  that  the  two  roughly  correspond  ;  (2)  that,  in  general,  whole- 
sale prices  have  moved  faster  (whether  down  or  up)  than  retail  prices ;  and 
therefore  (3)  that  "  middlemen's  profits"  will  not  explain  the  rise  from  1896 
to  1907. 

recent  figures  of  the  U.  S.  Bureau  of  Labor  Statistics 
confirm  it. 

The  common  idea  that  "profiteers  "  are  responsible 
for  rising  prices  is,  as  will  be  more  clearly  seen  in 
Chapter  III,  a  reversal  of  the  truth.  Rising  prices 
are  responsible  for  profiteering. 


3.   Circular  Reasoning 

Obviously  no  explanation  of  a  general  rise  of  prices 
is  sufficient  which  merely  explains  one  price  in  terms 
of  another  price.  To  say  that  the  cause  of  rising 
"  prices  "  is  rising  ''  wages  "  is  merely  to  say  that  the 
prices  of  commodities  have  risen  because  the  price  of 
labor  has  risen  ;  and  we  might  as  well  turn  it  about  and 
say  that  the  price  of  labor  has  risen  because  the  prices 
of  commodities  have  risen  and  so  driven  workmen  to 


Sec.  3]  THE   CAUSES  15 

strike  for  higher  wages.  It  is  equally  futile  to  say  that 
finished  products  have  risen  because  the  raw  materials 
have  risen ;  or  that  the  raw  materials  have  risen  because 
finished  products  have  risen. 

Such  explanations  are  as  unsatisfactory  as  the  an- 
swer of  the  gardener  who,  when  asked,  ''Where  is  the 
hoe?  "  replied,  "It's  with  the  rake,"  and  when  asked, 
''Where  is  the  rake?"  replied,  "It's  with  the  hoe." 
Such  alleged  explanations  were  shrewdly  caricatured 
by  the  cartoon  showing  many  persons  standing  in 
a  circle,  each  accusing  his  neighbor :  the  consumer 
blaming  the  retailer ;  the  retailer,  the  wholesaler ;  the 
wholesaler,  the  middleman ;  the  middleman,  the  manu- 
facturer ;  the  manufacturer,  the  workman ;  the  work- 
man, the  trust;  while  (to  complete  the  circle)  the 
trust  blames  the  extravagant  consumer. 

It  is  true  that  individual  prices  do  react  on  one  an- 
other in  thousands  of  ways.  But  the  several  pushes 
and  pulls  among  individual  prices  are  not  what  raises 
them  as  a  group.  Such  forces  within  the  group  could 
not  move  the  group  itself  any  more  than  a  man  can 
raise  himself  from  the  ground  by  tugging  at  his  boot- 
straps. We  cannot  explain  the  rise  or  fall  of  a  raft  on 
the  ocean  by  observing  how  one  log  in  the  raft  is 
linked  to  the  others  and  is  pulled  up  or  down  by  them. 
It  is  true  that  some  prices  rise  more  promptly  than 
others  and  give  the  proximate  reason  for  raising  the 
others.  The  whole  raft  of  prices  is  bound  together  and 
its  parts  creak  and  groan  to  make  the  needed  adjust- 
ments.^ But  such  readjustments  between  prices  do 
not  explain  why  the  whole  raft  of  prices  has  risen. 

1  For  further  discussion  of  this  point,  see  §  15  below  and  Chapter 
III,  §§  13  and  14. 


16  STABILIZING  THE   DOLLAR  [Chap.  II 

4.  The  Error  of  Selecting  Special  Cases 

Nor  will  special  causes  working  on  selected  com- 
modities prove  to  be  general  enough  to  explain  the 
concerted  behavior  of  commodities.  While  "  scarcity," 
for  instance,  will  go  far  toward  explaining  the  rise  of 
certain  selected  prices,  it  will  not  help  explain  changes 
in  the  general  scale  or  level  of  prices,  —  at  least  not 
before  the  Great  War. 

Thus,  even  if,  for  reasons  of  scarcity,  wheat  should 
rise,  let  us  say,  20%,  nevertheless,  so  unimportant  is 
wheat  relatively  to  the  great  mass  of  commodities  in 
commerce,  that  the  index  number  for  300  commodities, 
computed  by  the  United  States  Bureau  of  Labor 
Statistics,  would  be  affected  only  1%.  So  also  potatoes 
would  have  to  rise  100%  to  raise  the  index  number 
by  1%.  And  even  these  negligible  figures  exaggerate 
the  effect  on  the  general  price  level,  —  for  several 
reasons,  which  need  not  be  discussed  here. 

The  truth  is,  most  explanations  of  the  general  rise  in 
prices  are  mere  graspings  at  the  first  straw  in  sight 
that  seems  to  offer  any  explanation.  People  uncon- 
sciously pick  out  some  particular  cases  with  which  they 
happen  to  be  familiar  and  drag  them  before  the  public. 
A  middleman  or  a  trust  raises  prices,  a  firm  announces 
a  rise  because  of  the  demands  of  labor  unions,  a  crop 
failure  raises  the  price  of  a  cereal,  —  and  immediately 
some  one  hails  the  event  as  a  representative  cause  of 
the  high  cost  of  living.  The  newspapers,  with  impres- 
sive headlines,  feature  the  stories  about  such  cases; 
and  the  more  unusual  and  unrepresentative  the  cases 
are,  the  more  glaringly  they  are  featured. 

Only  a  general  survey  is  of  any  real  value,  and  such 


Sec.  5]  THE  CAUSES  17 

a  general  survey,  as  we  shall  see,  fails  to  confirm  many, 
if  any,  of  the  numerous  popular  impressions  which  have 
gone  abroad. 


5.   The  Argument  from  Probability 

All  those  who  have  offered  such  explanations  make       , 
one  fatal  mistake.     They  look  at  the  wrong  side  of  the 
market.     They  seek  the  causes  wholly  in  the  goods,  the  | 
prices  of  which  have  changed,  and  not  at  all  in  the 
gold  dollar,  in  terms  of  which  those  prices  are  expressed. 

Which  of  these  —  goods  in  general,  or  the  dollar  in 
particular  —  is  the  more  likely  to  vary  ?  Is  it  credible 
that  commodities  should  rise  and  fall  so  concertedly 
without  some  simple  common  cause?  Is  it  not  more 
probable  that  the  dollar,  which,  as  such  a  common 
cause,  affects  all  the  cormnodities  it  buys,  should  fall  in  . 

value  than  that  hundreds  of  individual  changes  in  the      .    ^    ^'^'• 
values  of  other  commodities  should  all  happen  to  occur      Va/^^ 
in  concert  ?     Are  not  the  coincidences  involved  a  little  lirt*'**;    ^^V 
too  remarkable  ?     It  is  one  of  the  accepted  maxims  of  /^(y^^^  ^ 
logic  that  a  complicated  multiple  explanation  is  not  I  •, ''^'^ 
to  be  presumed  if  a  simple  single  explanation  can  be 
assumed. 

Mere  chance  almost  never  plays  onesidedly.  If  we 
throw  nine  coins  in  the  air,  it  will  not  surprise  us  if  four 
or  five  of  them  come  up  heads,  but  it  will  surprise  us 
greatly  if  all  come  up  heads.  The  chance  of  such  a 
coincidence  is  exactly  1  in  512.  The  chance  that 
eight  would  come  up  heads  is  less  than  1  in  50  (exactly 
10  in  512). 

Now,  of  the  nine  groups  of  commodities  included  in 
the  index  number  of  the  United  States  Bureau  of  Labor 
c 


M 


18  STABILIZING   THE   DOLLAR  [Chap.  II 

Statistics,  only  one  group  (house-furnishings)  fell  in 
price  between  1896  and  1913,  the  year  before  the 
war.  Assume  that  the  nine  groups,  like  the  nine  coins, 
are  independent  of  one  another,  —  for  instance  that 
"  clothes  and  clothing,"  when  they  rise,  do  not  pre- 
vent "drugs  and  chemicals"  from  falling;  assume 
further  that,  for  any  one  group  among  the  nine,  the 
chances  of  rise  or  fall  are  even ;  then  the  chances  that 
eight  out  of  the  nine  would  rise  coincidently  would  (as 
in  the  case  of  the  coins)  be  exactly  10  in  512. 

In  actual  fact  the  chances  are  less  ;  for  the  assump- 
tion that  a  rise  is  as  likely  as  a  fall  is  not  true  of  any 
ordinary  commodity.  A  fall  is  really  what  we  would, 
in  most  cases,  expect  because  of  improvements  in 
methods  of  production.  Taking  this  fact  into  consid- 
eration the  chances  that  eight  groups  would  rise  coin- 
cidently are  therefore  less  than  10  in  512  —  doubtless 
less  than  1  in  100. 

Of  the  243  commodities  recorded  under  the  nine 
groups  only  27  fell  in  price.  It  is  true,  of  course, 
that  not  all  of  the  243  commodities  are  independent. 
Many  commodities  like  bread  and  flour,  or  pig  iron 
and  iron  products,  move  necessarily  in  sympathy  with 
one  another  ;  but,  even  so,  we  may,  I  believe,  safely  put 
the  chance  of  such  an  accidental  rise  simultaneously 
in  216  commodities  out  of  243  at  less  than  one  in  a 
thousand.  " 

This  all  corresponds  with  common  sense.  We  sel- 
dom have  world-feasts  or  world-famines.  If  the  corn 
crop  is  short  in  some  places,  it  is  usually  abundant 
in  other  places.  If  it  is  short  in  all  places,  the  crop 
of  wheat  or  barley  or  some  other  staple  food  is 
practically  certain  to  be  at  least  normal.     If  there  is 


Sec.  6]  THE   CAUSES  19 

war  in  Japan,  it  is  not  likely  that  there  will  also  be  war 
in  India.  A  world-war  or  even  anything  as  near  to  a 
world-war  as  the  recent  conflict  is  a  most  —  the  most 
—  unprecedented  event  in  all  history. 

Our  conclusion  is  that,  so  far  as  the  argument  from 
probability  can  help  us,  it  is  not  likely  that  the  simulta- 
neous rises  and  falls  of  hundreds  of  commodities  hap- 
pen merely  by  coincidence.  It  is  much  more  likely 
that  there  is  one  common  cause  or,  at  most,  a  very  few 
common  causes.  We  find  two  such  common  causes 
at  hand,  monetary  depreciation  and  (since  1914)  the 
war,  which,  as  we  shall  see,  has  affected  prices  chiefly 
through  monetary  depreciation  also.  If  these  are  not  ^  ' 
the  common  causes,  what  are  they?  —(A/^  [ 

The  same  question  arose  concerning  the  general  fall  (jum^^*^ 
of  prices  between  1873  and  1896.     Then  there  was  an- 
other explanation  besides  the  monetary  one  —  the  in- 
wveased^r  cheaper  production  through  invention.     But , 
while   in   the   period   from   1873  to   1896  this  cause,  \ 
cheaper  production,  worked  with  the  trend,  a  down-'         t  [i 
ward    price    movement,    from    1896    to   1913   it   has 
worked  against   the    trend.     No    common    cause   fori   ft^^ 
the  upward  trend  of  prices  between  1896  and  1913 — \ 
except  money  —  has  ever  been   suggested   or  seems 
likely  to  be. 

6.   The  Argument  from  Statistics 

So  much  for  the  mere  probabilities  of  the  case.  But 
we  have  several  other  lines  of  evidence.  First  there  is 
the  evidence  of  direct  statistics,  which  evidence  points 
to  the  same  conclusion.  These  statistics  show  that,  up 
to  the  outbreak  of  the  war  in  1914,  there  was  no  pro- 


20  STABILIZING  THE   DOLLAR  [Chap.  II 

gressive  scarcity  of  goods  in  general  but  rather  an  in- 
creased abundance  and  that  this  increased  abundance 
probably  continued  in  the  United  States  even  during 
the  war. 

Professor  W,  I.  King,  in  his  Wealth  and  Income  of 
the  People  of  the  United  States,  shows  that  "  real  in- 
come "  (that  is,  income  in  terms  of  commodities  in- 
stead of  dollars)  has  risen  every  census  year  since  1850 
(excepting  only  1870,  following  the  Civil  War,  when 
there  was  a  slight  diminution)  !  ^  The  volume  of  gen- 
^y  eral  trade  in  the  United  States  has  increased,  on  the 
>^  average,  faster  than  population.  According  to  the 
statement  of  Nat.  C.  Murray  of  the  Bureau  of  Statistics 
of  the  Department  of  Agriculture,  the  per  capita  pro- 
duction of  the  ten  leading  crops  in  the  United  States 
has  increased  during  the  last  twenty  years. ^  Professor 
E.  W.  Kemmerer  ^  and  the  present  writer  '^  find  that  the 
volume  of  trade  has  increased  greatly  and  continu- 
ously during  that  time. 

This  was  true  even  during  the  war.  Professor 
Wesley  Clair  Mitchell  has  made  a  study,  under  the 
War  Trade  Board,  on  the  production  of  raw  materials 
which  indicates  that  the  raw  materials  used  in  the 

1  King's  figures  (in  terms  of  the  average  purchasing  power  of 
the  dollar  in  the  years  1890-99)  for  the  successive  census  years 
from  1850  to  1910  are  69,  79,  82,  111,  169,  232,  262  (p.  129). 

^  Monthly  Crop  Reports,  U.  S.  Department  of  Agriculture, 
November,  1917. 

*  "Inflation,"  American  Economic  Review,  Vol.  VIII,  No.  2, 
June,  1918. 

"  "Will  the  Present  Upward  Trend  of  World  Prices  Continue?" 
American  Economic  Review,  Sept.,  1912;  "Equation  of  Exchange," 
American  Economic  Review,  June,  1919 ;  "  The  New  Price  Revolu- 
tion," Department  of  Labor,  Information  and  Education  Service, 
March,  1919. 


Sec.  61  THE   CAUSES  21 

United  States  in  1918  were  16%  more  than  in  1913  and 
2%  more  than  in  1917.  The  physical  volume  of  trade 
in  1918  is  estimated  variously  by  my  own  fragmen- 
tary studies,  published  and  unpublished,  and  by  the 
studies  of  others  to  be  from  22%  to  41%  above  that  in 
1913  and  8%  above  that  in  1917.i 

President  Wilson,  in  his  address  to  Congress,  August 
8,  1919,  on  the  High  Cost  of  Living  gave  other  im- 
pressive examples  as  to  foods,  especially  eggs,  frozen 
fowls,  creamery  butter,  salt  beef,  and  canned  corn, 
showing  that  there  is  no  scarcity  to  account  for  high 
prices. 

Aside  from  this  argument  as  to  the  abundance  of 
goods  in  belHgerent  countries,  there  is  the  additional 

1  The  mistake  has  sometimes  been  made  of  thinking  that  the 
stream  of  goods  absorbed  by  the  war  should  be  deducted  from  the 
total  volume  of  trade  and  that  only  the  remainder,  used  for  civil 
consumption,  should  be  considered  for  comparison  with  pre-war 
times.  They  say  that  this  volume  of  goods  was  greatly  reduced 
and  so  naturally  bears  a  scarcity  price. 

But,  granted  that  the  scarcity  of  goods  for  civil  consumption 
enhanced  these  goods,  as  estimated  subjectively,  it  must  not  be 
overlooked  that  it  tended  just  as  much  to  enhance  money,  as 
estimated  subjectively.  There  is  no  need  therefore  of  any  change  in 
price. 

Thus,  suppose  that,  for  whatever  reason,  the  same  price  level 
were  kept  in  the  war  as  before  it,  but  that  the  people  were  suffering 
from  lack  of  food  and  clothing.  These  starving  people  might 
subjectively  esteem  bread  and  clothes  ten  times  as  highly  as  before, 
but,  if  they  did,  they  would  certainly  esteem  the  money  to  buy 
these  with  also  ten  times  as  highly  as  before. 

Professor  J.  S.  Nicholson  in  his  War  Finance  writes :  "The  late 
Robertson  Smith  used  to  say  that  in  the  East  great  famines  were 
often  accompanied  by  no  particular  rise  in  prices.  The  people 
died  of  hunger,  but  their  demand  was  not  effective.  They  had  no 
more  money  than  usual." 

Prices  do  express  the  intensity  of  wants  for  goods,  but  only 
relatively  not  absolutely. 


22  STABILIZING  THE   DOLLAR  [Chap.  II 

evidence  of  high  prices  in  areas  not  directly  affected  by 
the  war. 

Mr.  0.  P.  Austin,  Statistician  of  the  National  City 
Bank,  says : 

"Raw  silk,  for  example,  for  which  the  war  made  no  special 
demand. and  which  was  produced  on  the  side  of  the  globe  opposite 
that  in  which  the  hostilities  were  occurring,  advanced  from  $3.00 
I  ;  per  pound  in  the  country  of  production  in  1913  to  $4.50  per  pound 
j  I  in  1917,  and  over  $6.00  per  pound  in  the  closing  months  of  the  war. 
Manila  hemp,  also  produced  on  the  opposite  side  of  the  globe  and 
not  a  war  requirement,  advanced  in  the  country  of  production 
from  $180  per  ton  in  1915  to  $437  per  ton  in  1918.  Goat-skins 
from  China,  India,  Mexico  and  South  America  advanced  from 
25  cents  per  pound  in  1914  to  over  50  cents  per  pound  in  1918,  and 
yet  goat-skins  were  in  no  sense  a  special  requirement  of  the  war. 
Sisal  grass  produced  in  Yucatan  advanced  from  $100  per  ton  in  1914 
at  the  place  of  production  to  nearly  $400  per  ton  in  1918,  and  Egyp- 
tian cotton,  a  high-priced  product  and  thus  not  used  for  war  purposes, 
-^  /  jumped  from  14  cents  per  pound  in  Egypt  in  1914  to  35  cents  per 
(  pound  in  1918.  Even  the  product  of  the  diamond  mines  of  South 
Africa  advanced  from  60  to  100  per  cent  in  price  per  karat  when 
compared  with  prices  existing  in  the  opening  months  of  the  war. 

"  The  prices  are  in  all  cases  those  in  the  markets  of  the  country  in 
which  the  articles  were  produced  and  in  most  cases  at  points  on  the 
globe  far  distant  from  that  in  which  the  war  was  being  waged. 
They  are  the  product  of  countries  having  a  plentiful  supply  of 
cheap  labor  and  upon  which  there  has  been  no  demand  for  men 
for  service  in  the  war.  The  advance  in  the  prices  quoted  is  in  no 
sense  due  to  the  high  cost  of  ocean  transportation,  since  they  are 
those  demanded  and  obtained  in  the  markets  of  the  country  of 
production. 

"  Why  is  it  that  the  product  of  the  labor  of  women  and  children 
who  care  for  silkworms  in  China  and  Japan,  of  the  Filipino  laborer 
who  produces  the  Manila  hemp,  the  Egyptian  fellah  who  grows  the 
high-grade  cotton,  the  native  workman  in  the  diamond  mines  of 
South  Africa,  the  Mexican  peon  in  the  sisal  field  of  Yucatan,  the 
Chinese  coolie  in  the  tin  mines  of  Malaya,  or  the  goat-herd  on  the 


Sec.  7]  THE  CAUSES  23 

plains  of  China,  India,  Mexico  or  South  America  has  doubled  in 
price  during  the  war  period?"  ^ 

Lord  D'Abernon  found  that  in  England  those  ob- 
jects of  luxury  "  which  would  seem  to  be  influenced  not 
at  all  or  only  very  remotely  and  to  a  very  small  degree 
by  increased  cost  of  labor  and  materials,"  such  as  old 
books,  prints  and  coins,  had,  nevertheless,  advanced, 
roughly  speaking,  fifty  per  cent  during  the  war. 

There  seems  little  doubt  that  the  rise  in  prices  dur- 
ing the  war,  even  in  Russia  where  scarcity  of  goods 
played  a  part,  was,  nevertheless,  chiefly  due  to  paper 
money  depreciation ;  while  in  the  United  States,  prices 
rose  before  America  entered  the  war,  not  because  of  any 
general  scarcity  here,  but  because  of  gold  depreciation 
brought  about  by  huge  imports  of  gold  (a  billion  dollars) 
from  Europe,  in  other  words,  gold  "  inflation."  After 
we  entered  the  war  there  has  been  added  credit  inflation. 

7.  Price  Movements  Vary  with  Monetary  Systems 

Thus  far  our  argument  has  been  one  of  elimination.  I 
We  have  excluded  the  probability  of  the  commodity 
explanation  for  rising  prices  (except,  to  some  extent,  in ; 
war-time)  and  find  ourselves  almost  forced  to  a  mone- 1 
tary  explanation.  | 

But  we  have  still  more  positive  evidence  of  the  great 
and  constant  influence  of  money  and  money  substi- 
tutes on  prices. 

We  find,  in  the  first  place,  that  countries  having  like 
monetary  standards  have  like  price  movements.     Thus 

*  "Prices,  Yesterday,  Today,  and  Tomorrow,"  address  delivered 
before  the  Editorial  Conference  of  the  New  York  Business  Pub- 
Ushers  Association,  April  11,  1919. 


24 


STABILIZING  THE   DOLLAR 


[Chap.  II 


—  to  consider  gold-standard  countries  —  there  is  a  re- 
markable family  resemblance  between  the  curves  in  Fig- 
ure 3,  tracing  the  index  numbers  of  the  United  States 
and  England.  As  long  as  the  two  countries  were 
on  or  near  a  common  gold  basis,  that  is,  in  the  entire 
period  except  when  one  or  the  other  country  was  on  a 
paper  basis  (because  of  the  Napoleonic  wars  or  the  Civil 
War),  English  and  American  price  movements  have 
been  strikingly  parallel. 
joo- 

90- 


Fig.  5.     Price  Movements  in  Five  Gold-Standard  Countries 

Showing  how  similar  the  ups  and  downs  of  prices  have  been.  This  simi- 
larity exists  in  spite  of  differences  in  methods  of  calculating  the  five  index 
numbers. 

For  most  other  gold-standard  countries  the  available 
statistics  begin  with  1890 ;  and  from  that  year  until 
the  outbreak  of  the  war  in  1914  there  is  a  remarkable 
similarity  among  the  price  movements  of  these  coun- 
tries, namely,  the  United  States,  Canada,  England, 
France,  Germany,  Austria,  Italy,  Switzerland,  Russia, 
Sweden,  Denmark,  Holland,  Belgium,  and  even,  though 
less  strikingly,  far-away  Australia,  New  Zealand,  Japan, 
and  India. 


Sec.  7] 


THE   CAUSES 


25 


The  chief  of  these  statistics  are  given  in  Figure  5. 
It  is  surprising  how  Httle  any  one  gold-standard  coun- 
try departs  from  the  average  of  all.^ 


Fig.  6.  Price  Movements  in  the  United  States  under  the  "  Green- 
back "  Standard  and  in  the  United  Kingdom  under  the  Gold 
Standard 

Affording  an  instance  of  differing  price  movements  under  differing  mone- 
tary standards. 


Again,  countries  which  have  the  silver  standard  in 
common  also  have  price  movements  in  unison  as,  for 
instance,  India  and  China  from  1873  to  1893. 

We  find,  in  the  second  place,  that  countries  of  unlike 
monetary  standards  have  unlike  price  movements. 
Thus  we  find  a  great  contrast  between  the  gold  and 
silver  countries  as  soon  as  gold  and  silver  themselves 
separated.     Speaking  roughly,  we  may  say  that,  be- 

^  A  still  greater  agreement  would  be  found  if  the  statistics  in  the 
different  countries  were  constructed  by  the  same  methods.  Pro- 
fessor Wesley  Clair  Mitchell  has  shown  this  by  reconstructing  the 
statistics,  in  this  way,  in  certain  selected  cases. 


26  STABILIZING   THE   DOLLAR  [Chap.  II 

tween  1873  when  gold  and  silver  broke  apart,  and 
1896,  the  price  level  in  gold  countries  fell  25%  and 
in  silver  countries  rose  30%. 

Again  countries  with  exceptional  monetary  stand- 
ards show  exceptional  price  movements.  When, 
during  a  paper  money  regime  such  as  during  the  Civil 
War  in  the  United  States  or  the  Napoleonic  wars  in 
England,  the  curve  tracing  an  index  number  in  terms 
of  paper  is  compared  with  that  in  terms  of  gold,  the 
former  looks  like  a  great  blister  upon  the  latter. 
Figure  6  illustrates  this  fact. 

So  also  when  a  country  shifts  over  from  a  gold  to  a 
silver  standard  and  from  a  silver  to  a  gold  standard,  as 
did  India,  its  price  movements  shift  likewise.  Figure 
7  illustrates  this. 

In  the  third  place,  not  only  do  the  price  levels  of 
various  countries  having  different  monetary  standards 
differ  from  one  another,  but  the  degrees  of  difference  cor- 
respond to  the  degrees  of  difference  in  their  standards, 
that  is,  the  variations  in  prices  of  goods  correspond 
with  the  variations  in  the  values  of  the  two  metals  as 
measured  each  in  terms  of  the  other. 

For  instance,  the  divergence  between  prices  of  goods 
in  gold  countries  and  in  silver  countries  corresponds 
roughly  to  the  divergence  between  the  prices  of  gold 
and  silver.  Thus,  between  1873  and  1893  the  price 
of  silver  in  London  fell  40%,  while  the  price  level  of 
commodities  in  gold  countries  relatively  to  prices  in 
silver  countries  fell  about  40%. 

Similarly,  prices  in  the  United  States  in  the  green- 
back days  of  the  '60s  and  '70s,  as  compared  with 
prices  in  gold  countries,  such  as  England  and  Ger- 
many, shifted,  in  a  general  way,  with  the  premium 


Sec.  7] 


THE  CAUSES 


27 


W^3S'32,d'3^ 


^l^^ll 


28 


STABILIZING  THE  DOLLAR 


[Chap.  II 


on  gold  in  terms  of  greenbacks,  and  with  the  New 
York  rate  of  exchange  on  London.  This  is  shown 
in  Figure  8. 

For  the  period  of  the  recent  war  the  data  are  so 
meager  that  it  is  impossible  to  express  the  exact  re- 


Fig.  8.     The   Ratio  of  the   American  to  the   English  Price   Level 
Compared  with  the  Ratio  of  American  to  English  Money 

Showing  a  fairly  close  similarity  and  throwing  light  on  the  contrasts  of  Fig- 
ure 6.  Thus,  when,  during  1861-1864,  the  currency,  or  greenbacks,  which 
would  buy  a  unit  of  gold  rose  rapidly  (as  shown  by  the  lower  curve),  Ameri- 
can prices  in  greenbacks  also  rose  rapidly  relatively  to  English  prices  in  gold 
(as  shown  by  the  upper  curve) ;  and  when,  during  1864-1878,  the  former 
ratio  fell,  the  latter  ratio  fell  also. 


lations  in  figures,  but  we  can  arrange  the  different 
countries  in  the  approximate  order  in  which  their  prices 
rose.  As  a  result,  we  find  that  the  order  of  the  na- 
tions corresponds  in  general  with  the  order  in  which 
the  currency  in  these  nations  has  been  inflated  by 
paper  as  well  as  with  the  order  in  which  their  mone- 
tary units  have  depreciated  in  the  foreign  exchange 
markets.  This  order  —  of  ascending  prices  and  roughly 
of  expanding  currency  during  the  war  —  is  :  Australia, 
India,  New  Zealand,  United  States,  Canada,  Denmark, 


Sec.  8]  THE  CAUSES  29 

Holland,  England,  Switzerland,  Italy,  France,  Norway, 
Sweden,  Germany,  Austria,  Russia. 


8.   Price  Movements  Vary  with  the  Money  Supply 

The  ups  and  downs  of  prices  roughly  correspond  with 
the  ups  and  downs  of  the  money  supply.  Through- 
out all  history  this  has  been  so.  For  this  general 
broad  fact  the  evidence  is  sufficient  even  where  we 
lack  the  index  numbers  by  which  to  make  accurate 
measurements.  Whenever  there  have  been  rapid 
outpourings  from  mines,  following  discoveries  of  the 
precious  metals  used  for  money,  prices  have  risen 
with  corresponding  rapidity.  This  was  observed  in 
the  sixteenth  century,  after  great  quantities  of  the 
precious  metals  had  been  brought  to  Europe  from  the 
New  World ;  and  again  in  the  nineteenth  century, 
after  the  Californian  and  Australian  gold  mining  of 
the  fifties ;  and,  still  again,  in  the  same  century  after 
the  South  African,  Alaskan,  and  Cripple  Creek  min- 
ing of  the  nineties.  Likewise  when  other  causes 
than  mining,  such  as  paper  money  issues,  produce 
violent  changes  in  the  quantity  or  quality  of  money, 
violent  changes  in  the  price  level  usually  follow. 

The  war  has  furnished  important  examples  of 
these  points.  In  the  United  States  the  curve  for  the 
quantity  of  money  in  circulation,  and  the  curve  for 
the  index  number  of  prices  run  roughly  parallel,  the 
price-curve  seeming  to  follow  the  money-curve  after 
a  lag  of  one  to  three  months.  It  was  in  August,  1915, 
that  the  quantity  of  money  in  the  United  States  began 
its  rapid  war-made  increase.  One  month  later,  prices 
began  to  shoot  upward.     In  February,  1916,  money 


y 


30  STABILIZING   THE    DOLLAR  [Chap.  II 

suddenly  stopped  increasing,  and  about  two  months 
later  prices  stopped  likewise.  Similar  striking  corre- 
spondences have  continued  to  occur.  Figure  9  shows 
these. 

The  same  sort  of  correspondence  (with  a  probable 
three  months'  lag)  has  been  found  by  Nicholson  ^ 
for  England  and  (by  inference,  at  least)  by  Cassell  ^ 
for  Russia. 

9.   Kinds  of  Inflation 

It  is  well  known  that  a  great  increase,  i.e.,  "  infla- 
tion," of  paper  money  raises  prices.  But  there  are  two 
other  forms  of  inflation  which  do  so  also,  gold  inflation 
and  credit  inflation. 

War  finance  is  the  prolific  source  of  inflation.  The 
war  has  exemplified  this  in  all  three  forms.  Russia 
indulged  in  the  simple  crass  inflation  of  paying  Gov- 
ernment bills  by  printing  irredeemable  paper.  Before 
the  Bolshevist  regime  the  Russian  Government  print- 
ing presses  turned  out,  according  to  reports,  a  million 
roubles  an  hour,  day  in  and  day  out,  for  over  a  year  at 
a  stretch.  Under  Bolshevism  the  output  has  been 
even  greater,  a  total  of  eighty  billion  dollars  in  nominal 
value  having  been  issued,  which  is  more  than  the  money 
of  all  the  rest  of  the  world  put  together.  It  is  reported 
also,  on  apparently  good  authority,  that,  under  the 
Bolshevist  regime,  the  Russian  Bureau  of  Printing 
and  Engraving  has  issued  counterfeit  Spanish  paper 
money  and  used  it  in  Spain  for  Bolshevist  propaganda. 

The  Bolshevist  Government,  in  this  case,  swindles 

^  J.  Shield  Nicholson,  War  Finance,  p.  100. 

^Gustav  Cassel,  "Present  Situation  of  the  Foreign  Exchange," 
Economic  Journal,  March  and  September,  191G. 


Sec.  9] 


THE  CAUSES 


31 


NUMBER 


or  DOLLARS 


Fig.  9.     Money  and  the  Price  Level 

Showing  a  correspondence  between  the  quantity  of  money  and  the  level  of 
prices.  Since  the  middle  of  1915.  when  the  quantity  of  money  in  the  United 
States  began  to  be  greatly  affected  by  the  war,  the  correspondence  has  been 
close,  changes  in  the  price  level  seeming  usuaUy  to  follow  changes  in  the 
quantity  of  money  one  to  three  months  later.  (The  apparent  discrepancy 
between  the  upper  and  lower  figures  at  the  right  is  due  to  a  change  in  the 
official  method  of  computation  adopted  by  the  Federal  Reserve  Board.) 


32  STABILIZING   THE    DOLLAR  [Chap.  II 

the  Spanish  people  and,  through  the  high  cost  of  Hv- 
ing,  makes  them  pay  for  Bolshevist  propaganda ! 
This  is  a  specially  interesting  case  and  illustrates  the 
close  similarity  between  counterfeiting  and  inflation, 
either  of  which  mulcts  the  public. 

Germany  allowed  the  people,  when  a  new  loan  was 
asked,  to  deposit  the  bonds  of  the  previous  loans  at 
certain  banks  which  were  authorized  to  issue  paper 
money  to  the  depositor  who  then  lent  this  paper  money 
to  the  Government.  In  the  United  States  also.  Liberty 
Bonds  were  to  some  extent  used  as  collateral  at  banks 
which,  in  turn,  deposited  them  with  Federal  Reserve 
Banks  and  received  their  notes. 

During  the  war  the  neutral  countries  were  flooded 
with  gold.  This  gold  did  not  add  to  real  wealth. 
When,  directly  or  indirectly,  it  found  its  way  into  the 
hands  of  an  American  munition  maker,  food  producer, 
or  other  seller  of  goods,  it  acted  simply  as  a  requisition 
for  goods  by  one  American  on  another  American.  It 
was  merely  a  yellow  token,  like  a  brass  check,  redeem- 
able in  our  own  goods.  Such  an  increase  in  the  num- 
ber of  such  tokens,  or  counters,  could  only  cause  them 
to  depreciate. 

War  finance  brought  us  still  another,  the  most  mod- 
ern, kind  of  inflation,  due  not  to  the  increase  of  money 
proper  but  to  the  increased  volume  of  bank  deposits 
subject  to  check.  Banks  sometimes  subscribed  to 
Liberty  Loans  simply  by  writing  deposits  on  their 
books  to  the  credit  of  the  Government,  and  individuals 
often  lent  to  the  Government  by  borrowing  of  the 
banks,  the  sums  so  borrowed  being  likewise  created 
by  the  banks  as  deposits  on  their  books.  Deposits 
subject  to  check  have  increased  greatly,  and  until  the 


Sec.  9]  THE  CAUSES  33 

loans  which  gave  them  birth  are  paid  off,  these  deposits 
stay  in  circulation  Hke  money,  being  transferred  by 
check  from  the  original  bank  customer  to  the  Govern- 
ment (as  his  subscription  to  bonds) ;  then  from  the 
Government  to  munition  makers,  etc. ;  then  from  them 
to  steel  producers,  and  so  on,  indefinitely. 

Even  gold  inflation  became  transformed  into  credit 
inflation  because  the  gold  was  used  as  bank  reserves, 
the  basis  of  bank  deposits.  During  the  war  the  people 
of  all  gold-using  belligerents  were  asked  to  turn  over 
their  gold  to  the  banks  to  become  bank  reserves. 
Thus  gold  was  "  mined  out  of  the  people's  pockets  " 
and  intrusted  to  the  banks  where  it  had  a  multiplied 
effect ;  for  every  dollar  of  reserve  can  support  several 
dollars  of  deposits. 

It  was  failure  of  individuals  to  save  the  funds  loaned 
to  the  Government  which  chiefly  inflated  deposits ; 
they  lent  by  borrowing.  A  Committee  of  the  Ameri- 
can Economic  Association  appointed  to  study  the 
problem  of  the  purchasing  power  of  money  in  war:^ 
time  reported :  "  The  public  should  understand  that 
lending  by  borrowing,  though  much  better  than  noth- 
ing, is  still  a  very  unsatisfactory  way  to  help  the  Gov- 
ernment. By  raising  prices,  such  a  procedure  tends 
to  shift  the  cost  of  the  war  to  the  poor  who  pay  it  in 
a  higher  cost  of  living." 

In  England  it  was  found  (as  might  have  been  ex- 
pected) that  the  introduction  of  "  continuous  bor- 
rowing," advocated  by  Mr.  Drummond  Eraser,  ^  which 
absorbed  savings  as  rapidly  as  they  could  be  made, 
and  before  they  had  a  chance  to  be  dissipated  in  per- 

1  See  Professor  H.  S.  Foxwell,  Papers  on  Current  Finance,  Lon- 
don (MacmiUan),  1919,  pp.  241-244. 

D 


\ 


1^? 


34  STABILIZING  THE   DOLLAR  [Chap.  II 

sonal   gratification,   immediately   reduced  deposits  or 
credit  inflation. 

In  all  cases  where  the  amount  subscribed  is  not 
saved,  the  Government  creates  or  secures  purchas- 
ing power  without  creating  any  equivalent  goods  to 
purchase.  It  either  creates  the  purchasing  power 
out  of  whole  cloth,  as  in  Russia,  or  authorizes  banks 
to  create  it  out  of  whole  cloth,  as  in  Germany,  Eng- 
land, and,  to  a  less  extent,  the  United  States.  All  of 
these  methods  of  war  finance,  like  the  greenback  method 
in  the  Civil  War  and  the  Continental  paper  money 
method  of  the  Revolution,  may  be  defended  on  the  plea 
of  military  necessity,  but  they  are  inflation  none  the 
less,  even  when  gold  redemption  has  been  nominally  ^ 
maintained,  and  they  therefore  tend  to  add  to  the  cost 
of  living.  As  Dr.  A.  C.  Miller  of  the  Federal  Reserve 
Board  has  said,  "  Inflation  is  no  less  inflation  when 
gilded  with  gold." 

10.   Extent  of  War  Inflation 

On  the  whole,  the  money  in  circulation  in  the  United 
States  rose  from  three  and  one  third  billions  in  1913  to 
five  and  a  half  billions  in  1918,  and  bank  deposits 
from  thirteen  to  twenty-five  billions,  both  approxi- 
mately corresponding  to  the  rise  in  prices. 

Taking  a  world-wide  view,  the  money  in  circula- 
tion in  the  world  outside  of  Russia  increased  during 
the  war  from  fifteen  billions  to  forty-five  billions  and 
the  bank  deposits  in  fifteen  principal  countries  from 
twenty-seven  billions  to  seventy-five  billions.  That 
is,  both  money  and  deposits  have  trebled ;  and  prices, 
on  the  average,  have  perhaps  trebled  also. 

1  See  Appendix  IV,  §  1. 


Sec.  11]  THE   CAUSES  35 

The  increase  of  over  thirty  biUions  in  the  naoney  of 
the  world  (outside  of  Russia)  is,  as  Austin  says,  "  more 
in  its  face  value,  than  all  the  gold  and  all  the  silver 
turned  out  by  all  the  mines  of  all  the  world  in  427 
years  since  the  discovery  of  America." 

It  is  a  common  impression  that  wars  always  raise 
prices.  But  a  study  of  index  numbers  in  the  bellig- 
erent countries,  during  the  Napoleonic  wars,  War 
of  1812,  Mexican,  Crimean,  Civil,  Franco-Prussian, 
Spanish-American,  Boer,  Russo-Japanese  wars  and 
the  World  War  indicates  that  war  seldom  raises  prices 
except  when,  and  to  the  extent  that,  the  costliness 
of  the  war  forces  recourse  to  inflation  as  a  fiscal  ex- 
pedient of  governments  or  their  people. 

The  conclusion  toward  which  the  foregoing  argu- 
ments (and  others  which  might  be  added)  lead  is  that, 
in  the  past,  the  chief  disturber  of  the  peace,  so  far 
as  the  purchasing  power  of  money  is  concerned,  has 
invariably,  or  at  any  rate  almost  invariably,  been 
money  itself,  not  the  goods  which  money  purchases. 

II.   Money  Illusions 

The  attraction  which  inflation  policies  have  for  so 
many  people  grows,  in  part  at  least,  out  of  what  may 
be  called  the  money  illusions. 

The  general  public  finds  it  hard  to  admit  that  there , 
can  be  too  much  money.  Money,  however  abundant,  1 
always  seems  scarce.'     Each  individual  wants  all  the  ^ 

1  Cf.  Bullock's  Monetary  History  of  th"  United  States,  N.  Y, 
(Macmillan),  1900,  p.  38;  see  also  Irving  Fisher,  "The  'Scarcity' 
of  Gold,"  Cotton  and  Finance,  New  York  City,  February  15,  1913. 
The  recent  attempts  of  the  gold-mining  interests  in  England  and 
the  United  States  to  secure  a  Government  subsidy  utilized  this 
illusion. 


36  STABILIZING   THE    DOLLAR  [Chap.  II 

money  he  can  get  and  naturally  reasons  that  a  country, 
like  an  individual,  cannot  have  too  much.  If  the 
reasoning  were  sound,  it  would  justify  counterfeiting. 
Counterfeiting  does  enrich  the  counterfeiter  —  but 
at  the  expense,  of  course,  of  others,  even  if  the  counter- 
feit is  never  detected.  Inflation  might  almost  be 
called  legal  counterfeiting. 

After  a  rapid  inflation  once  starts,  the  clamor  for 
more  money  often  grows  louder  and  louder,  just  as 
when  a  dipsomaniac  once  gets  under  the  influence  of 
liquor  he  calls  for  more  and  more  of  that  deceptive 
agent. 

Of  all  the  illusions  which  cluster  about  money,  the 
one  which  most  interests  us  here  is  the  illusion  that 
money  is  always  fixed  in  value,  that  "  a  dollar  is  a 
dollar."  If  this  were  really  true,  the  present  book 
would  not  have  been  written.  That  so  many  people 
assume  it  to  be  true  is  the  reason  there  is  so  little  de- 
mand for  a  change.  For  why  try  to  stabilize  what 
is  already  supposed  to  be  stable? 

Money  is  so  much  an  accepted  convenience  in  prac- 
tice that  it  has  become  a  great  stumbling  block  in 
theory.  Since  we  talk  always  in  terms  of  money  and 
live  in  a  money  atmosphere,  as  it  were,  we  become  as 
unconscious  of  it  as  we  do  of  the  air  we  breathe. 

To  shake  ourselves  free  of  these  illusions  it  would 
help  greatly  if,  for  the  phrase  "  a  general  rise  in  prices," 
we  should  substitute  the  phrase,  "  a  fall  in  the  pur- 
chasing power  of  the  dollar."  Our  attention  would 
then  be  focused  on  the  money,  which  is  the  chief  con- 
troller and  disturber  of  prices. 

Even  many  well  informed  people  bolster  up  the 
illusion  that  the  dollar  is  a  stable  standard  of  value 


Sec.  11]  THE   CAUSES  37 

by  reference  to  the  fact  that  "  the  price  of  gold  " 
never  changes.  Only  recently  a  former  Government 
officer  asserted  that  the  value  of  gold  is  evidently 
constant  because  its  price  is  fixed ! 

I  once  asked  a  dentist  if  the  ''  high  cost  of  living  " 
had  affected  the  price  of  his  materials. 
Yes,  of  course,"  he  replied. 

Of    the   gold    you    buy  for  fillings?  "   I  ventured 
jokingly,  expecting  him  to  know  that  this  could  not  be. 

To  my  surprise,  he  answered,  ''  I  suppose  so,"  and 
sent  his  assistant  to  look  the  matter  up. 

She  returned  presently  and  solemnly  informed  us 
that  the  price  he  was  paying  for  his  gold  was  sub- 
stantially the  same  as  it  always  had  been. 

"  Isn't  that  surprising !  "  he  exclaimed,  "  gold  must 
be  a  very  stable  commodity." 

"  It's  just  as  surprising,"  I  replied,  "  as  that  the 
price  of  a  quart  of  milk  is  always  two  pints  of  milk." 

''  I  don't  see  the  point." 

"  Well,  what  is  a  dollar?  "  I  asked. 

"  I  don't  know,  — what  is  it?  " 

That  question  is  vital.  The  almost  universal  igno- 
rance of  the  answer  is  chiefly  responsible  for  the  almost 
universal  misunderstanding  of  the  high  cost  of  living 
and  the  ups  and  downs  of  the  dollar's  worth ! 

A  dollar  is  defined  by  statute  as  25.8  grains  of  "  stand- 
ard "  gold  (that  is,  of  gold  of  which  900  parts  out  of 
1000  are  pure  gold) .  Consequently  the  actual  pure  gold 
in  a  dollar  is  -^  of  25.8  grains  or  23.22  grains.  Since 
an  ounce  is  480  grains,  the  number  of  dollars  in  an 

ounce  of  pure  gold  is  ^r^-^  or  20TVf)  dollars.     In  other 
words,   any   lump   of   gold    containing    one    hundred 


38  STABILIZING   THE   DOLLAR  [Chap.  II 

ounces,  taken  by  a  gold  miner  to  the  Mint,  can  be 
cut  up  and  coined  into  2067  dollars  and  handed  back 
to  him.  Thus,  fixing  the  pure  gold  in  the  dollar  at 
23.22  grains  necessarily  fixes  the  price  of  pure  gold 
at  $20.67  an  ounce.  Naturally,  then,  the  miner  gets 
$20.67  an  ounce  and  this  "  price  "  can  never  vary  so 
long  as  the  weight  of  the  dollar  does  not  vary.  In 
short  we  may  say,  omitting  fractions,  that  gold  is 
always  worth  twenty  dollars  an  ounce  simply  because 
a  dollar  is  a  twentieth  of  an  ounce  of  gold,  just  as  a 
quart  of  milk  is  always  worth  two  pints  of  milk  because 
a  pint  is  half  a  quart.  Gold  is  thus  stable  merely 
in  terms  of  itself. 

But,  of  course,  the  fixity  of  the  dollar's  weight 
(and  therefore  of  the  price  of  gold  in  terms  of  gold 
itself)  does  not  fix  its  value  in  exchange  for  other 
commodities.  It  does  not  exempt  gold  from  the  ef- 
fects of  supply  and  demand.  The  value  of  the  dollar, 
in  the  sense  of  its  general  purchasing  power,  is  not 
stable  but  fluctuates  with  supply  and  demand  as  does 
the  value  in  exchange,  or  purchasing  power,  of  any- 
thing else.  There  is  only  this  difference :  since  a  de- 
scending value  of  gold  cannot  lower  the  price  of  gold 
it  must  raise  the  prices  of  other  things  in  terms  of  gold ; 
and  since  an  ascending  value  of  gold  cannot  raise  the 
price  of  gold,  it  lowers  the  prices  of  other  things  in 
terms  of  gold. 

Thus  the  supply  and  demand  of  gold  (and  of  its 
paper  and  credit  substitutes  which  also  affect  its  value) 
cannot  be  thwarted.  Since  we  deny  to  such  supply 
and  demand  the  normal  outlet  of  raising  or  lowering 
the  price  of  gold,  they  take  their  revenge,  so  to  speak, 
by  lowering  or  raising  the  prices  of  other  things. 


Sec.  12]  THE  CAUSES  39 

If,  instead  of  gold,  we  were  to  make  milk  the  stand- 
ard, or  eggs,  —  that  is,  if  we  used  these  to  purchase 
all  other  things,  —  they  would  acquire  the  same  fixity 
of  price  —  that  is,  price  in  terms  of  milk  or  eggs ;  and 
we  would  then  fall  victims  to  the  same  illusion  of  in- 
herent fixity.  If  a  dollar,  instead  of  being  23.22  grains 
of  gold,  were,  let  us  say,  a  dozen  eggs,  obviously  the 
price  of  eggs  would  always  be  a  dollar  a  dozen  simply 
because  a  dollar  is  a  dozen  eggs.  If  the  hens  did  not 
lay,  the  price  of  eggs  would  not  rise  (or  vary  at  all) 
but,  instead,  the  prices  of  other  commodities  in  terms 
of  eggs  would  fall ;  while,  if  eggs  were  a  drug  on  the 
market,  their  price  would  not  fall  (or  vary  at  all) 
but  the  prices  of  other  commodities,  in  terms  of  eggs, 
would  rise  —  and  the  mystified  public  would  then 
be  inquiring  gravely  "  why  this  high  cost  of  living?  " 
The  world's  prices  would  then  be  at  the  mercy  of  hens 
just  as  now  they  are  at  the  mercy  of  mines,  as 
well  as  of  banks  and  of  governmental  and  private 
financiering. 

In  colonial  days,  in  Virginia,  tobacco  was  money. 
In  those  days  a  high  price  of  wheat  might  have  been 
attributed  to  scarcity  of  wheat  when  really  due  to 
abundance  of  tobacco,  just  as  to-day  we  attribute  the 
high  prices  of  most  things  to  a  supposed  scarcity  of 
these  things  when  it  is  really  due  to  abundance  of 
money. 

12.   The  Instability  of  the  Gold  Standard  as  Compared 
with  an  Egg  Standard  and  Others 

In  order  to  see  what  the  purchasing  power  of  a  dollar 
is  from  time  to  time  we  need  merely  to  invert  the 
index  number   showing   the  general   level  of  prices; 


40 


STABILIZING   THE    DOLLAR 


[Chap.  II 


for  if  this  level  doubles,  the  purchasing  power  of  the 
dollar  is  halved,  and  vice  versa. 

Figure    10   shows   both.     The   upper   curve   shows 
the  variations  in  the  price  level  and  the  lower  curve 


Fig.  10.  The  Level  of  Prices  of  Commodities  in  Terms  of  Gold 
(Upper  Curve)  Contrasted  with  Its  Reciprocal,  the  Purchasing 
Power  of  the  Dollar  in  Terms  of  Commodities  (Lower  Curve)  and 
with  the  Price  of  Gold  (Middle  Horizontal  Line) 

Since  many  commodities  constitute  a  better  standard  of  value  than  one 
commodity,  the  apparent  fall  and  rise  of  commodities  (upper  curve)  really 
means  a  rise  and  fall  in  gold  (lower  curve),  while  the  mere  constancy  of 
the  price  of  gold  in  terms  of  itself  is  shown  by  the  middle  (horizontal)  line. 
The  lower  curve  is  the  important  one  and,  with  others,  is  shown  in  the  next 
diagram.  Fig.  11. 

shows  the  opposite  variations  in  the  purchasing  power 
of  the  dollar.  That  is,  the  upper  curve  shows  the 
changes  of  commodities  expressed  in  terms  of  gold 
dollars  and  the  lower  curve  shows  the  changes  in  the 
gold  dollar  expressed  in  terms  of  commodities ;  while 
the  middle  and  horizontal  line  shows  the  constancy 
of  the  price  of  gold  in  terms  of  gold. 

As  the  lower  curve  in  Figure  10  shows,  the  purchas- 
ing power  of  the  dollar  over  other  things  in  general 
has  fluctuated  widely.     If  the  war  period  were  added, 


Sec.  13]  THE   CAUSES  41 

the  fluctuations  would  be  even  more  violent  (as  may 
be  seen  from  Figure  3). 

If  we  compare  this  lower  curve  of  Figure  10  with 
similar  curves  calculated  for  other  commodities,  we 
may  see  whether  gold  is  really  any  better  standard 
than  any  one  of  these  other  commodities. 

Figure  11  gives  this  comparison.  In  it  I  have 
plotted  not  only  the  purchasing  power  of  gold,  but 
also  the  purchasing  power  ^  of  pig  iron,  pig  lead,  cotton, 
silver,  eggs,  wheat,  carpets,  and  brick.  We  see  that, 
in  terms  of  general  purchasing  power,  gold  is  no  more 
stable  than  eggs  and  considerably  less  stable  than 
carpets ! 

It  will  also  be  of  interest  to  see  the  relative  sta- 
bility of  gold  and  the  other  articles  combined.  To 
paraphrase  an  old  adage  we  may  say  that  "  in  union 
there  is  stability."  The  curve  representing  the  com- 
bined eight  articles,  pig  iron,  pig  lead,  copper,  silver, 
eggs,  wheat,  carpets,  and  brick  (which  were  originally 
selected  at  random,  i.e.  as  representative  articles  and 
without  thought  of  being  combined),  is  also  shown  in 
Figure  11. 

13.    Seeing  Ourselves  as  Others  See  Us 

It  will  help  emancipate  us  from  the  money  illusions 
if  we  look  at  a  foreign  country  instead  of  at  our  own. 
Wlien,  between  1871  and  1896,  the  price  of  silver  in 
London  went  down,  we  readily  ascribed  the  resultant 
rise  of  prices  in  India  —  a  silver-standard  country  — 
to    the    "  depreciation    of    silver."     But    the    Indian 

1  The  figures  for  these  curves  were  easily  found  by  dividing  the 
index  number  for  any  commodity,  pig  iron,  for  instance,  by  the  index 
number  for  commodities  in  general. 


42 


STABILIZING   THE    DOLLAR 


[Chap.  II 


i    ^   .5;   .§    S 


I    .^    -^    ^    g   §    ?i    5 


Fig.  II.     The    Relative    Stability    of    Certain    Commodities  Each 
Measured  in  Terms  of  Commodities  in  General 

The  curve  for  gold  is  the  same  as  the  lower  curve  of  Fig.  10.  It  shows  the 
rise  and  fall  of  a  unit  of  gold  as  measured  by  its  purchasing  power  over  com- 
modities in  general.  The  curve  for  silver  shows  likewise  the  changes  in 
the  purchasing  power  of  a  unit  of  silver.  The  other  curves  show  the  piu-- 
chasing  power  of  pig  iron,  pig  lead,  copper,  eggs,  wheat,  Brussels  carpets, 
and  brick. 

It  will  be  observed  that  gold,  as  a  standard  of  general  purchasing  power, 
has  been  more  stable  than  silver  but  less  stable  than  eggs  or  carpets,  which 
last  proves  to  be  the  most  stable  standard  of  purchasing  power  during  this 
period.  As  to  wheat,  its  power  to  purchase  commodities  has  fluctuated 
widely  but  has  shown  a  general  horizontal  trend. 


Sec.  13]  THE  CAUSES  43 

merchant,  from  his  point  of  view,  saw  only  a  rise  in 
the  price  of  gold,  and  readily  ascribed  the  fall  of  Ameri- 
can prices  to  the  "  appreciation  of  gold." 

Sir  David  Barbour  ^  tells  the  following  illuminating 
incident :  "  The  late  General  Keatings,  V.  C,  informed 
me  that  when  he  was  Commissioner  in  Assam  he  had 
an  interview  with  an  Indian  merchant  and  mentioned 
to  him  how  serious  the  fall  in  the  value  of  the  rupee 
was.  The  merchant  was  surprised  and  said  he  heard 
from  his  agents  in  Calcutta  every  week  and  none 
of  them  had  said  anything  about  the  fall  in  the  value 
of  the  rupee.  After  a  pause  he  added :  '  But  they 
mentioned  the  rise  in  the  price  of  gold,  and  perhaps 
that  may  be  what  you  are  thinking  of.'  " 

Both  the  Englishman  and  the  Hindu  assumed  his 
own  money  fixed,  as  a  matter  of  course.  Each  could 
see  the  aberration  of  the  other's  money  but  was  bUnd 
to  that  of  his  own.  The  Hindu  thought  gold  had 
gone  up  because  he  measured  gold  by  silver,  and  the 
Englishman  thought  silver  had  gone  down  because 
he  measured  silver  by  gold.  Each  was  nearer  right 
about  the  other's  country  than  about  his  own !  Yet 
neither  was  as  nearly  right  as  he  would  have  been 
if  he  had  gauged  the  values  of  gold  and  silver  alike 
in  terms  of  other  commodities.  It  is  reasonable  to 
assume  that  the  general  mass  of  commodities  is  stabler 
than  the  single  commodity,  silver,  or  the  single  com- 
modity, gold. 

This  illusion,  that  our  own  money  is  immovable 
while  everything  else  moves,  is  like  the  illusion  we 
often  experience  when  the  railway  train  in  which 
we  are  sitting  passes  another  train  standing  on  a  switch, 

1  The  Standard  of  Value,  London  (Macmillan),  1912,  p.  20,  n. 


44  STABILIZING   THE    DOLLAR  [Chap.  II 

or  like  the  illusion  that  the  sun  rises  and  sets  instead 
of  the  earth  revolving. 

Thus  we  have  been  deceived  by  appearances  in 
commerce  just  as  we  have  been  deceived  by  appear- 
ances in  astronomy.  The  earth  seems  to  be  fixed 
and  all  the  other  heavenly  bodies  seem  to  move.  It 
is  true,  of  course,  that  these  bodies  do  move;  yet 
most  of  the  motion  which  we  are  tempted  to  attribute 
to  them  is  not  theirs  but  the  earth's.  So  money  seems 
to  be  fixed  and  all  the  other  commodities  seem  to 
move.  And  it  is  true  that  these  commodities  do  move ; 
yet  most  of  the  motion  we  are  tempted  to  attribute 
to  them  is  not  of  them  but  of  money. 

It  took  a  long  time  to  overcome  the  apparent  evi- 
dence of  our  senses  in  regard  to  the  actual  rising  and 
setting  of  the  sun,  moon,  and  stars.  In  fact,  the  first 
astronomers  did  not  doubt  this  popular  view  but  ac- 
cepted it  and  succeeded,  by  numerous  special  and  com- 
plicated assumptions  (of  "  cycles  "  and  "  epicycles  "), 
in  explaining  all  observed  movements,  even  those  of  the 
planets.  This  was  the  system  of  Ptolemy ;  and  one  of 
the  greatest  revolutions  in  human  thought  was  the  adop- 
tion of  the  later  astronomical  system  of  Copernicus. 
This  revolution  of  thought  in  astronomy  was  based 
chiefly  on  the  presumption  that  a  simple  explanation 
is  more  likely  to  be  correct  than  a  complicated  one. 

Sooner  or  later  a  similar  revolution  will  be  wrought 
in  popular  economics  and  we  shall  come  to  see  that 
the  course  of  prices  is  due  chiefly  to  the  movement  of 
money  and  not  to  coincident  movements  of  all  or  almost 
all  other  commodities  at  once.  We  now  think  only 
of  the  gold-value  of  goods ;  we  shall  then  think  also  of  the 
goods- value  of  gold. 


Sec.  14]  THE   CAUSES  45 

14.   A  Visit  of  Santa  Claus 

Many  people,  after  being  forced  to  admit  that  an 
abundance  or  scarcity  of  money  does,  in  some  way, 
raise  or  lower  the  prices  of  other  things,  still  remain 
somewhat  mystified  because  they  cannot  trace  the 
intermediate  process  by  which  money  operates  on 
the  price  of  a  given  article.  "  How,"  they  ask,  "  does 
the  import  of  gold  (or  the  issue  of  paper  money  or  the 
creation  of  bank  deposits)  really  affect  the  price  my 
grocer  charges  me  for  butter?  He  has  probably 
never  even  heard  of  this  new  gold  (or  paper  or  bank 
credit),  much  less  seen  it." 

The  answer  is  that  more  money  in  tills  and  pockets 
means  more  lavish  spending,  i.e.  a  greater  demand  for 
goods,  without  any  greater  supply. 

To  make  the  picture  vivid,  let  us  imagine  a  finan- 
cial Santa  Claus.  Let  us  suppose  that,  before  his 
visit,  the  average  per  capita  amount  of  money  in 
actual  "  circulation  "  in  the  United  States,  that  is, 
all  money  except  that  of  the  United  States  Treasury, 
is  about  $40.  On  Christmas  Day  Santa  Claus  doubles 
this  amount.  Each  individual  person,  firm,  and  bank 
suddenly  has  on  hand  twice  as  much  as  before. 

Now,  while  the  amount  carried  by  any  one  individual 
necessarily  fluctuates  because  of  his  expenditures  and 
receipts,  in  a  large  group  of  people  the  average  amount 
carried  usually  fluctuates  but  little.  If,  then,  an  addi- 
tion to  the  total  circulation  is  suddenly  made  so 
large  as  to  put  forty  extra  dollars  per  capita  in  the 
pockets  of  the  people,  the  first  thought  of  most  people 
will  be  how  to  expend  this  extra  sum  instead  of  merely 
keeping  it  idle  in  their  pockets.     If  they  should  be 


46  STABILIZING   THE   DOLLAR  [Chap.  II 

inclined  to  hoard  it  in  stockings  or  safes  or  bury  it 
in  the  earth  or  drop  it  into  the  sea,  it  would  have  no 
tendency  to  raise  prices.  Instead,  however,  they 
will  seek  to  make  some  use  of  it  either  by  expending 
it  for  goods  or  by  depositing  it  in  banks.  In  one  or 
both  of  these  two  ways  the  surprised  recipient  of  Santa 
Claus'  bounty  will,  in  most  cases,  have  disposed  of 
his  surplus  a  few  days  after  the  supposed  visit  of  Santa 
Claus.  Let  us  assume  that  half  is  disposed  of  by  ex- 
pending and  half  by  depositing. 

The  part  expended  will  evidently  tend  to  raise 
prices ;  for  the  sudden  expenditure  of  $20  per  capita 
will  mean  a  spectacular  rush  upon  the  shops.  Suppose, 
as  is  probably  about  the  truth,  that  the  average  in- 
dividual expended  or  turned  over  his  per  capita  $40 
in  about  two  weeks.  This  is  about  three  dollars  a 
day,  or  $300,000,000  a  day  for  the  entire  country. 
If  within  five  days  from  his  Christmas  present  the 
average  person  should  expend  half  of  the  additional 
$40,  i.e.  $20,  the  result  would  be  $4  additional  per 
day  per  capita,  or  $400,000,000  per  day  for  the  nation, 
or  more  than  the  entire  original  daily  expenditure 
of  money.  Such  a  sudden  briskness  in  trade  would 
astonish  the  shopkeepers  and  lead  them  promptly 
to  raise  their  prices ;  otherwise,  in  many  cases,  their 
stocks  of  goods  would  be  entirely  depleted  in  a  few 
days. 

At  first  sight,  it  might  seem  that  it  would,  accord- 
ing to  this  supposition,  only  require  five  days  for  every 
one  to  get  rid  of  his  extra  money,  so  that  the  flurry  in 
prices  would  be  only  temporary.  Such  reasoning  is, 
however,  fallacious,  for  the  only  way  in  which  the 
individual  can  get  rid  of  his  money  is  by  handing  it 


Sec.  14]  THE   CAUSES  47 

over  to  somebody  else.  Society  as  a  whole  is  not  rid 
of  it.  If  the  shopkeepers,  who,  under  our  Santa  Claus 
hypothesis,  have  already  had  their  till-money  multi- 
plied by  two,  receive,  in  addition,  the  surplus  cash 
of  their  customers,  they  will  be  doubly  embarrassed 
with  a  surplus  fund  on  hand  and  mil,  in  turn,  seek 
to  make  some  use  of  it,  either  by  investing  it  in  goods 
for  their  business  or  by  depositing  it  in  banks.  That 
is,  the  expending  by  each  person  of  his  surplus  merely 
results  in  pushing  it  along  from  person  to  person. 
The  average  person  still  has  more  money  to  buy  with ; 
but  nobody  has  more  goods  to  sell.  The  effect  on 
prices  will  be  upward,  and  this  effect  will  go  on  until 
prices  have  reached  a  sufficiently  high  level  to  stop 
the  process. 

Nor  can  this  conclusion  be  avoided  by  supposing 
that  most  of  the  money  is  not  expended,  but  de- 
posited in  banks.  The  bankers  whose  deposits  are 
thus  suddenly  swollen  will  now  be  the  ones  with  the 
surplus.  Bankers  do  not  wish  to  have  idle  reserves, 
and  they  will  make  the  increase  in  the  reserves  the 
basis  for  an  increase  of  business.  Moreover,  those 
who  deposited  the  surplus  money  will  draw  checks 
against  it  in  the  effort  to  expend  it  rather  than  keep 
it  idle,  and  these  checks  will  likewise  raise  prices. 
And,  as  the  prices  rise,  the  banks'  customers  will  have 
to  keep  pace  with  the  rise  by  enlarging  the  scale  of 
their  operations,  loans,  and  deposits.  For  instance, 
a  merchant,  in  order  to  buy  a  certain  stock  in  trade 
with  money  borrowed  at  the  bank,  will  have  to  borrow 
more  because  the  prices  of  the  commodities  he  needs 
have  gone  tip. 

In  the  end,  the  doubhng  of  society's  money  will  mean 


48  STABILIZING   THE   DOLLAR  [Chap.  II 

an  increase  (1)  of  the  money  in  actual  circulation, 
(2)  of  the  money  in  banks,  (3)  of  the  loans  and  de- 
posits based  on  this  money,  and  (4)  of  prices.  Ap- 
proximately all  these  will  be  doubled.  For,  as  long 
as  prices  fail  to  double,  the  surpluses  and  the  tendency 
to  spend  them  will  continue  to  exist.  Individuals, 
tradesmen,  and  bankers  will  all  be  trying  to  make 
use  of  their  surplus,  and  their  efforts  to  do  so  must 
tend  to  raise  prices.  Only  when  prices  have  reached 
about  double  their  original  level  will  the  large  stock 
of  ready  money  cease  to  be  regarded  by  its  possessors 
as  a  surplus.  At  that  time,  since  $80  will  buy  only 
what  $40  bought  before,  the  additional  $40  will  no 
longer  seem  superfluous.  People  will  find  their  wages 
or  incomes  doubled  likewise.  Thus,  if  formerly  the 
average  individual  was  accustomed  to  expend  $1000 
a  year  and  to  carry  an  average  balance  of  $40,  he 
will  now  expend  $2000  and  carry  an  average  balance 
of  $80,  the  $80  being  exactly  the  same  relatively  to 
$2000  as  the  former  $40  was  relatively  to  $1000. 

Needless  to  say,  the  imaginary  case  just  described 
is  highly  theoretical.  Many  qualifications  need  to 
be  made  in  practice,  especially  those  due  to  the  exist- 
ence of  debts.  As  will  be  emphasized  in  the  next 
chapter,  debts  are  fixed  in  terms  of  dollars  and,  un- 
hke  prices,  could  not  change.  The  supposed  prank 
of  Santa  Claus  would  therefore  upset  debts  as  well 
as  disturb  somewhat  the  exactly  proportional  changes 
just  supposed.  The  essential  fact  that  an  increase  of 
money  tends  to  increase  prices  would,  however,  remain 
unaltered. 

The  imaginary  example  we  have  given  represents 
roughly  what  happens  when  new  gold  is  discovered. 


Sec.  15]  THE   CAUSES  49 

The  mine  owners  convert  their  product  into  money, 
getting  coin  or  ''  yellowbacks "  (gold  certificates) 
from  the  mint.  They  then  find  themselves  in  pos- 
session of  money  far  beyond  what  is  needed  for  pocket 
money.  Suppose  one  of  these  men  gets  from  the 
mint  a  thousand  gold  dollars  while,  for  pocket  money, 
$50  is  sufficient ;  he  is  almost  sure  to  get  speedily 
rid  of  at  least  $950  by  spending  it  for  enjoyables, 
investing  it  in  durables,  or  depositing  it  in  the  bank. 
In  any  case  he  and  the  hundreds  of  others  in  the  same 
situation  tend  to  raise  prices  in  the  community  where 
they  are  expending  their  money,  or  where  they  and 
others  draw  checks  on  the  banks  in  which  it  is  de- 
posited. 

It  was  thus  that  prices  rose  in  the  mining  camps 
of  California  a  half  dozen  decades  ago  and  in  Colorado 
and  the  Klondike  one  or  two  decades  ago.  This 
local  rise  of  prices  soon  communicated  itself  to  other 
places ;  for  the  price  level  in  one  locality  cannot  greatly 
exceed  that  in  a  neighboring  locahty  without  causing  an 
export  of  money  from  the  former  to  the  latter  as  a 
cheaper  market  to  buy  in.  Thus,  new  money  gradually 
finds  its  way  into  circulation  throughout  the  world, 
raising  prices  as  it  flows  from  place  to  place,  the  process 
consisting,  in  all  cases,  of  the  effort  on  the  part  of 
somebody  to  make  use  of  an  otherwise  idle  surplus,  — 
a  surplus  which  cannot  be  dissipated  by  transferring 
it  from  hand  to  hand,  but  only  by  a  rise  of  prices. 

15.   Tracing  the  Invisible  Source  of  the  Tide 

This  operation,  by  which  an  increase  of  money  causes 
a  rising  tide  of  prices,  is  so  subtle  and  pervasive  that  it 
seems  to  come  from  nowhere  in  particular  and  every- 


50  STABILIZING   THE    DOLLAR  [Chap.  II 

where  in  general.  The  price  of  butter  at  the  corner 
grocery  is  lifted  on  this  tide  without  our  being  able 
to  observe  the  connection  of  the  rise  with  inflation, 
just  as  a  fisherman's  boat  is  lifted  by  the  tides  of  the  sea 
without  his  being  able  to  connect  the  rise  with  the  action 
of  the  moon. 

To  answer  categorically,  therefore,  the  question,  How 
does  inflation  raise  the  price  of  butter  at  the  corner  gro- 
cer's, we  may  say :  (1)  partly  because  his  customers 
have  more  money  to  spend,  and  (2)  chiefly  because  the 
prices  he  pays  to  the  wholesaler  have  been  raised ;  and 
the  wholesaler's  prices  have  been  raised  for  the  same 
two  reasons,  i.e.  (1)  partly  because  his  customers  have 
more  money  (and  purchasing  power  generally)  to  spend, 
and  (2)  chiefly  because  the  prices  he  has  to  pay  have 
been  raised ;  and  so  on  indefinitely.  In  this  explana- 
tion at  each  stage  the  chief  factor  is  the  second  —  the 
rise  of  some  other  prices.  But  as  we  proceed  to  trace  it 
back  through  other  stages  this  second,  apparently  chief, 
factor  is,  at  each  stage,  resolved  partly  into  the  first  — 
the  abundance  of  money.  What  is  not  thus  resolved  at 
the  early  stages  of  this  tracing  back  becomes  so  in  the 
end.  When,  therefore,  all  stages  are  considered,  the 
second  factor  melts  away,  and  the  first  factor  which  at 
any  one  stage  was  the  lesser  turns  out  to  be  "  the  whole 
thing." 

In  the  literature  on  the  high  cost  of  living  we  some- 
times find  partial  glimpses  of  the  series  of  readjustments 
above  described.  Some  newspapers  have  said  that 
higher  wages,  by  increasing  costs,  require  higher  prices 
of  the  goods  produced  and  that,  in  turn,  high  prices  in 
the  form  of  the  high  cost  of  living  require  high  wages, 
and  so  on  in  "a  vicious  circle."     Others  have  called 


Sec.  16]  THE   CAUSES  51 

the  raising  of  prices  a  game  of  ring-a-round-a-rosy 
and  everybody  following  his  neighbor.  A  book, "  Keep- 
ing up  with  Lizzie,  "  has  been  patterned  on  this  idea. 
This  notion  that  in  the  price-raising  process  prices  in- 
fluence each  other  in  endless  chains  or  circles  is  quite 
correct,  but  the  notion  that  the  initial  step  is  arbitrary 
and  that  there  is  really  no  beginning  or  end  of  the  pro- 
cess is  incorrect.  Prices  do  not  lift  themselves  by  their 
own  bootstraps. 

In  short,  the  process  by  which  inflation  raises  prices 
is  misunderstood  because,  at  any  stage,  it  is  almost  in- 
visible. The  only  big  reason  the  grocer  can  give  for  rais- 
ing his  prices  is  that  the  wholesaler  has  raised  his.  The 
only  big  reason  any  expert  on  a  particular  price  can 
give  is  that  other  prices  have  risen.  But  when  one  price 
thus  boosts  another  it  simply  transmits  the  boosting 
power  of  the  underlying  inflation. 

1 6.   Other  Causes  than  Money 

The  price  level  is  affected  not  simply  by  the  quantity  ^ 
of  money  in  the  strict  sense  but  by  a  number  of  other 
factors.  The  price  level  may  rise  not  only  because  of 
an  increase  of  money  (whether  primary  money  like 
gold  or  secondary  money  like  paper),  but  also  because 
of  an  increase  of  deposit  currency,  "  money  I  have  in 
the  bank,"  which  is  paid  out  in  checks,  or  because  of 
an  increase  in  the  rapidities  of  circulation  of  the  money 
or  deposits,  or  because  of  a  decrease  in  the  volume  of 

1  There  are  still  a  few  students  of  money  who  do  not  accept 
any  form  of  the  "quantity  theory"  of  money.  Fortunately, 
however,  the  proposal  of  this  book,  described  in  Chapter  IV,  is 
not  bound  up  with  this  theory,  even  in  the  form  stated  in  my 
Purchasing  Power  of  Money.     See  below,  Appendix  II,  §  1,  D,  E. 


52  STABILIZING   THE    DOLLAR  [Chap.  II 

trade.  And  back  of  these  causes  (gold  money,  paper 
currency,  deposit  currency,  their  respective  velocities, 
and  trade)  lie  innumerable  other  causes  acting  through 
one  or  more  of  them. 

The  relative  importance  of  the  several  causes  in  affect- 
ing price  levels  varies  with  circumstances.  Thus,  in 
1914  at  the  first  shock  of  war,  there  were  very  comph- 
cated  changes  ^  including  a  slowing-down  of  trade  and  of 
the  velocities  of  money  and  of  the  deposit  or  check  circu- 
lation and  a  temporary  shift  from  credit  to  cash.  But 
in  almost  all  great  and  prolonged  price  movements  the 
chief  factor  is  the  quantity  of  money.  Seldom  has 
the  volume  of  trade  been  the  chief  factor ;  for  statistics 
show  a  great  steadiness  in  the  growth  of  the  volume  of 
trade. 

We  may  conclude,  on  the  basis  of  all  the  evidence, 
that  to  monetary  causes  in  general  (money,  deposits, 
and  their  velocities)  we  should  ascribe  the  great  bulk 
of  almost  all  changes  in  the  price  level.  In  short  the 
chief  causes  of  the  variations  in  the  purchasing  power 
of  the  dollar  are  to  be  found  in  the  dollar  itself. 

1  Irving  Fisher,  "Equation  of  Exchange  for  1914,  and  the  War," 
American  Economic  Review,  June,  1915 ;  see  also  same  journal, 
author,  and  subject,  June,  1919. 


CHAPTER   III 

THE    EVILS 

I.   The  Evil  of  High  Prices  is  Not  General 
Impoverishment 

Price  movements,  then,  are  usually,  and  for  the  most 
part,  of  monetary  origin.  We  must  not  be  deceived 
by  appearances.  Just  as  he  who  would  picture  the  as- 
tronomical movements  as  they  really  are  must  conceive 
a  mental  image  not  of  a  sun  and  stars  concertedly  rising 
and  setting  around  a  fixed  earth,  but  of  a  sun  and  stars, 
substantially  fixed,  shining  on  a  whirling  globe,  so  he 
who  would  picture  economic  movements  as  they  really 
are  must  likewise  conceive  not  of  the  concerted  dancing 
of  numberless  commodities  relatively  to  a  fixed  dollar, 
but  of  the  dance  of  the  dollar  relatively  to  a  nearly  fixed 
mass  of  commodities. 

But  here  the  reader  may  be  tempted  to  conclude  that 
the  high  cost  of  living  is  merely  nominal !  If  prices 
have  doubled  not  because  goods  have  become  scarce 
but  only  because  the  dollars  in  which  they  are  ex- 
pressed have  been  cut  in  two,  what  of  it  ?  If  we  use 
twice  as  many  dollars  because  we  have  twice  as  many 
to  use,  where  is  the  harm  ?  We  are  thus  brought  to  the 
third  question,  "  What  of  it?  " 

Now  it  is  quite  true  that  our  high  cost  of  living  is  not 
so  great  an  evil  as  some  people  think  it  to  be ;  it  is  not 
so  bad  as  though  the  cost  of  living  had  risen  while  in- 

53 


54  STABILIZING   THE    DOLLAR  [Chap.  Ill 

comes  had  not  risen.  That  would  mean  that,  for  the 
average  human  being,  economic  effort  was  produc- 
ing less  and  less.  But  the  fact  is  that,  in  general, 
throughout  the  world — certainly  before  the  war — goods 
had  not  been  growing  scarce.  Incomes  were  rising  all 
over  the  world  and,  in  general,  they  were  rising  faster 
than  the  cost  of  living.  Recurring  to  the  figures  of 
Professor  W.  I.  King,  we  find  that  the  estimated  per 
capita  income  in  the  United  States  increased  between 
1900  and  1910  by  41%,  whereas  the  price  level  rose 
only  25%. 

This  average  improvement,  however,  does  not  settle 
the  matter.  The  evil  is  not  one  of  average  well-being 
but  one  of  its  distribution,  and  the  question  remains : 
Who  has  got  the  benefit  of  this  increased  production? 
Some  incomes  change  less  than  others  and  some  do  not 
change  at  all.  It  is  in  this  inequality  —  an  inequality 
in  the  change  of  individual  incomes  —  that  the  chief 
evil  of  general  price  movements  is  to  be  found. 

If,  for  each  of  us,  the  rise  of  income  were  to  keep  up 
with  the  rise  in  the  cost  of  living,  then  the  high  cost  of 
living  would  have  no  real  meaning.  The  rise  would  be 
merely  on  paper. 

2.   Contracts  Upset 

But  no  such  perfect  adjustment  between  rise  in  in- 
come and  rise  in  cost  of  living  ever  occurs  or  can  occur. 
Agreements  made  at  various  times  to  pay  specific  sums 
of  money  at  later  times  make  this  impossible. 

Consider  the  debtor  and  creditor  relationship.  If 
Congress  should  suddenly  decree  that  the  present  fifty- 
cent  piece  should  henceforth  be  known  as  a  ''  dollar," 
it  is  clear  that,  in  practice,  the  change  would  not  be 


Sec.  3]  THE    EVILS  55 

merely  nominal ;  for  while  current  prices  would  quickly 
be  doubled  the  terms  of  contracts  already  made  would 
not  be  adjusted.  Therefore  every  creditor,  every  bond- 
holder, every  bank  depositor,  would  clearly  be  cheated 
out  of  half  his  due. 

If,  on  the  other  hand.  Congress  should  decree  that 
what  has  hitherto  been  a  "  dollar  "  should  henceforth 
be  fifty  cents,  every  debtor  would  be  suddenly  saddled 
with  a  weight  of  debt  twice  as  heavy  as  that  which  he 
had  originally  assumed. 

In  either  case'incalculable  injustice  would  be  wrought. 
One  of  the  parties  to  every  contract  would  be  swindled 
for  the  benefit  of  the  other;  and  the  swindle  would 
affect  the  fortunes  for  good  or  ill  of  almost  every  family 
in  the  land. 

Now  this  same  principle  of  hardship  applies  to  any 
change  in  the  purchasing  power  of  the  dollar. 

It  does  not  in  the  least  matter  whether  the  change  is 
intentional.  Moreover,  it  cannot  properly  be  said  that, 
for  an  unintentional  change,  there  is  no  human  respon- 
sibility. We,  the  people,  neglect  the  problem,  and  there- 
fore Congress  which,  under  the  Constitution,  has  the 
power  to  regulate  the  value  of  money,  neglects  it  also. 
Consequently,  with  each  change  in  the  purchasing 
power  of  money  (in  other  words,  with  each  change  in 
the  price  level),  some  people  lose  what  properly  belongs 
to  them  and  others  gain  what  does  not  properly  belong 
to  them. 

3.   Salaries  and  Wages  Slow  to  be  Adjusted 

Nor  does  the  injustice  stop  with  actual  outstanding 
contracts  enforcible  by  legal  process.  There  are 
many  charges  which  remain  fixed  from  mere  custom  or 


56  STABILIZING   THE    DOLLAR  [Chap.  Ill 

inertia  and  are  only  sluggishly  adjusted  to  a  change  in 
the  purchasing  power  of  money.  This  is  true  of  the 
salaries  of  clerks,  teachers,  and  public  officials,  and  of 
many  professional  fees.  It  is  also  true,  to  a  consider- 
able degree,  of  wages. 

In  recent  years  salaried  men  and  wage  earners  have 
been  losing ;  for,  while  salaries  and  wages  have  risen, 
they  have  not  kept  pace  with  the  rise  in  prices.  Some 
wages  have  remained  unchanged  for  months  or  years 
after  the  cost  of  living  has  risen,  and  then  they  have 
only  been  forced  up  by  strikes.  According  to  the  fig- 
ures of  the  United  States  Bureau  of  Labor  Statistics, 
real  wages,  i.e.  their  buying  power,  in  1917  when  we 
entered  the  war  were  only  a  little  over  two  thirds  of 
what  they  were  ten  years  before. 

Furthermore,  contrary  to  a  common  impression,  the 
average  workman  (though  not  every  type  of  workman) 
has  lost  ground  during  the  war.  The  real  wages  in 
1918  were  only  80%  of  those  of  1913. 

"  Minimum  wage  "  laws  lose  their  meaning  under 
these  circumstances ;  for  a  minimum  wage  which  is  at 
one  time  sufficient  to  maintain  the  standard  of  life  is 
later,  although  sanctioned  by  the  law,  quite  insufiicient. 

4.   Rates  Fixed  by  Law  or  Custom  also  Slow 

Then,  too,  there  are  the  numerous  prices  and  rates 
fixed  by  law  or  custom,  payable  to  public  utilities  and 
to  the  government.  These  include,  for  instance, 
licenses  and  fines,  and  transportation  fares  on  rail- 
roads and  trolleys. 

Before  the  war,  railroads,  under  their  legally  restricted 
rates,  found  difficulty  in  doing  business,  because,  while 


Sec.  4]  THE    EVILS  57 

the  prices  they  charged  were  fixed,  their  costs  of  opera- 
tion had  gone  up  with  the  rise  of  the  general  price 
level. 

Street  railways  have  likewise  suffered  because  their 
fares  were  fixed  by  law,  or  charter,  or  custom,  at  five 
cents.  Only  after  two  decades,  ending  in  bankruptcy 
or  near-bankruptcy,  have  they  secured,  in  some  cases, 
a  rise  of  fare  to  six,  seven,  eight,  and  sometimes  ten, 
cents.  In  fact  the  plight  of  street  railway  companies 
is  one  of  the  facts  most  eloquently  proclaiming  the  de- 
preciation of  money.  Mr,  Roger  Babson  has  calcu- 
lated that  the  street  railways  of  the  country  have  lost 
a  billion  dollars  from  this  cause. 

WTien  street  railways  or  water  power  rights  are  leased 
for  fifty  or  a  hundred  years  with  the  right  of  "  recap- 
ture "  by  the  Government,  it  makes  a  vast  deal  of  dif- 
ference what  the  dollar  will  be  at  the  end  of  that 
time.  The  Wisconsin  Supreme  Court  has  had  some 
interesting  cases  along  this  line. 

Bengal  is  assessed  for  taxation  on  a  permanent  settle- 
ment fixed  in  rupees  when  they  were  worth  2^  shillings 
each.  They  are  now  worth  only  1^  shillings  each  in 
gold,  and  gold  itself  has  depreciated  rapidly  !  As  Major 
W.  E.  McKechnie,  who  calls  my  attention  to  this  fact, 
well  says,  "  Those  who  made  the  permanent  settle- 
ment could  have  had  no  idea  that  money  fluctuated  in 
purchasing  power,"  Similar  absurdities  could  be  cited 
in  reference  to  Chinese  customs,^  and  legal  settlements 
in  England  and  other  countries, 

1  Under  an  existing  treaty  signed  by  eighteen  powers,  China 
cannot  increase  her  import  duties  beyond  a  5%  ad  valorem  tax 
based  on  an  average  of  the  prices  of  1897,  1898,  and  1899.  This 
-amounts  to  only  about  2\%  ad  valorem,  based  on  the  prices  of  to-day. 


58  STABILIZING   THE    DOLLAR  [Chap.  Ill 

5.   Periods  before  and  after  1896  Contrasted 

The  evils  both  of  rising  and  of  falling  prices  are  well 
illustrated  by  two  recent  sharply  contrasted  periods : 
that  from  1873  to  1896  and  that  from  1896  to  the  close 
of  the  Great  War. 

Prices  were  falling  during  the  first  of  these  two  periods. 
People  who  had  things  to  sell  —  the  farmer  and  the 
active  business  man  —  complained  that  their  profits 
were  being  cut  down  or  entirely  wiped  out ;  for  the 
prices  of  their  products  kept  falling  while  many  of  the 
charges  they  had  to  meet  —  interest,  rent,  etc.  — 
remained  fixed.  On  the  other  hand,  people  who  had 
money  to  lend  —  the  "  bloated  bondholder  "  and  the 
''  dead  hand  "  (estates,  foundations,  hospitals,  endowed 
churches  and  universities,  for  instance)  —  were  coming 
to  "  own  the  earth."  Their  money  incomes  were  fixed, 
but  each  dollar  would  buy  more  and  more  every  year. 
For  the  same  reason  salaried  clerks  were  waxing  fat  and 
comfortable. 

But  from  1896  to  the  present,  with  prices  rising  in- 
stead of  falling,  the  luck  changed.  The  creditor,  in 
his  various  guises  of  bondholder,  savings-bank  deposi- 
tor, lessor,  salaried  man,  and  wage  earner,  became  the 
victim;  while  the  stockholder,  the  farmer,  the  busi- 
ness "  enterpriser,"  and  the  bull  speculator  were  the 
winners  in  the  lottery.  In  a  word,  good  luck  befell 
the  man  who  took  what  was  left  after  paying  a  nearly 
fixed  number  of  dollars  (each  with  a  diminished  pur- 
chasing power)  for  his  operating  expenses,  —  his  inter- 
est, rent,  salaries,  wages,  etc. 

Before  the  war,  the  loss  to  the  creditor  was  proceed- 
ing at  the  rate  of  nearly  three  per  cent  per  annum. 


Sec.  6]  THE    EVILS  59 

During  the  war,  it  proceeded  at  about  eight  times 
that  rate. 

It  was  during  falling  prices  that  such  money-lenders 
as  Hetty  Green  and  Russell  Sage  made  their  fortunes. 
After  1896  and  up  to  the  present,  this  would  have  been 
impossible.  For  even  had  they  saved  every  penny  of 
interest  and  compounded  it,  they  would  have  had  only 
their  labor  for  their  pains  and  less  actual  purchasing 
power  in  the  end  than  when  they  began !  Because  of 
our  shrinking  dollar  no  one  could  have  accumulated 
fortunes  by  simple  saving  and  investment  at  interest 
since  1896. 

Hence  it  is  that  a  new  class  of  rich  now  inhabit  the 
palaces  on  Fifth  Avenue.  The  ''  bloated  bondholders  " 
could  not  keep  up  the  old  magnificence  under  the  grow- 
ing strain  of  high  prices.  They  have  given  place  to  the 
''  profiteers."  In  these  two  phrases  the  great  untutored 
public  shows  a  curious  intuitive  sense  for  the  truth 
which  it  cannot  quite  comprehend.  It  knows  at  least 
"  who  got  the  money." 

Shakespeare  stated  an  economic  truth  when  he  said 
"  there  is  a  tide  in  the  affairs  of  men  which,  taken  at  the 
flood,  leads  on  to  fortune."  This  tide  between  1873  and 
1896  carried  the  bondholders  on  to  fortune  and  made 
them  "  bloated,"  while  between  1896  and  to-day  it 
carried  the  stockholders  on  to  fortune  and  made  them 
"  profiteers." 

6.   The  Fault  Is  Not  Personal  but  Social 

It  will  do  no  good,  of  course,  to  rail  at  the  lucky  win- 
ners in  the  lottery.  The  public  was  greatly  mistaken 
in  attributing  low  prices  to  the  "  strangle-hold "  of 
wicked  bondholders  and  is  equally  mistaken  to-day  in 


60  STABILIZING   THE   DOLLAR  [Chap.  Ill 

attributing  high  prices  to  the  personal  turpitude  of 
profiteers.  The  fault  is  not  theirs.  While  they  have, 
in  a  sense,  won  their  neighbors'  stakes  or  picked  their 
neighbors'  pockets,  they  did  so  without  intent  to  de- 
fraud. They  have  simply  played  the  game.  We 
should  stop  the  game,  not  blame  those  who  play  it. 
How  can  we  blame  a  business  man  (especially  one  who, 
as  officer  of  a  corporation,  acts  in  the  interests  of 
others  whose  capital  he  is  managing)  for  getting  the 
best  prices  he  can  ?  We  cannot  expect  him  to  sell  be- 
low the  market.  In  fact,  if  market  conditions  cause 
profits  to  fall  into  his  lap,  he  would  be  recreant  in  duty 
to  throw  them  away.  What  we  should  aim  to  do  is  to 
make  such  abnormal  market  conditions  impossible. 

7.   Two  Illustrative  Cases 

Consider  a  working  girl  who  in  1896  put  a  hundred 
dollars  in  the  savings  bank.  To-day  if  she  has  allowed 
it  to  accumulate  at  3%  interest,  she  has  two  hundred 
dollars.  But  things  now  cost  about  three  times  what 
they  did  in  1896,  and  when  she  sets  out  to  spend  her 
two  hundred  dollars  she  finds  she  cannot  get  as  much 
for  it  as  she  could  have  got  at  the  beginning  for  her 
original  one  hundred  dollars.  After  a  score  of  years  of 
self-denial,  where  is  her  reward,  her  interest?  She  has 
(without  the  intention  of  anybody)  been  cheated  out  of 
it  all,  and  more  too,  merely  through  the  depreciation 
of  the  "  dollars  "  in  terms  of  which  her  savings  account 
has  been  kept.  Her  interest  accrued  not  even  fast 
enough  to  offset  the  depreciation  in  her  principal. 
Like  Alice  Through  the  Looking-Glass,  she  had  to  run 
as  fast  as  she  could  in  order  to  stay  in  the  same  place  ! 


Sec.  8]  THE   EVILS  61 

The  bondholder  is  in  the  same  plight.  Perhaps 
nominally  he  has  been  "  living  on  his  interest  " ;  but 
meanwhile  the  purchasing  power  of  his  principal  has 
been  decreasing,  so  that  really,  although  without  know- 
ing it,  he  has  been  living  on  his  capital.  For,  to  keep 
the  value  of  his  capital  unimpaired,  he  would  have  had 
to  reinvest  all  his  interest  and  more !  Meanwhile  the 
stockholder  has  made  what  the  bondholder  has  been 
losing.  * 

Dr.  J.  Pease  Norton,  referring  to  the  first  part  of  this 
period,  has  said:  "  The  investor  in  bonds  by  saving  all 
his  interest  payments  and  reinvesting  would  have  been 
able  to  maintain  his  principal  in  purchasing  power, 
but  had  he  done  this  he  would  have  had  no  income. 
Measured  in  purchasing  power,  the  investment  in  stocks 
shows  6%  per  annum  better  than  the  investment  in 
bonds."! 

8.   The  Extent  of  Social  Injustice 

The  total  financial  interests  thus  affected  by  changes 
in  the  price  level  are  colossal. ^  Shortly  before  the  war, 
Alfred  Neymarck  estimated  the  total  securities  then 
circulating  in  the  world  at  175  to  200  billions  of  dollars. 

And  to-day  the  volume  of  securities  is  greater,  and 
the  war-bonds  have  increased  the  total  by  probably 
more  than  50%. 

^  "Stocks  as  an  Investment  When  Prices  Are  Rising,"  Securities 
Review,  Scranton,  Pa.,  Sept.  1912.  Several  other  writers  (e.g. 
Charles  Rist  in  Revue  Economiqxie  Internationale,  Brussels,  March, 
1913)  have  shown  clearly  that  dividends  rise  greatly  during  rising 
prices  and  fall  greatly  during  falling  prices.  IjV  I 

2  For  the  enormity,  in  more  senses  than  one,  of  the  evils  of  paper 
money  inflation,  see  Sumner's  History  of  American  Currency,  N.  Y. 
(Holt),  1884;  Bullock's  Monetary  History  of  the  United  States,  N.  Y. 
(Macmillan),  1900  (especially  pp.  40  and  74). 


62  STABILIZING   THE    DOLLAR  [Chap.  Ill 

Besides  negotiable  or  circulating  securities  there  are 
many  private  debts  which  never  circulate.  There  are 
savings-bank  deposits  and  deposits  in  ordinary  banks, 
running  up  into  scores  of  billions  and  held  by  over  a 
score  of  million  of  depositors.  There  are  scores  of  bil- 
lions of  dollars  in  insurance  contracts  of  various  kinds, 
many  of  them  running  for  long  terms,  such  as  the  span 
of  human  lives.  The  widow  whose  husband  twenty 
years  ago  insured  his  life  for  her  benefit  gets  to-day  only 
a  little  over  one  third  of  the  purchasing  power  con- 
templated in  the  policy. 

Between  the  fall  of  1915  and  the  armistice  the  dollar 
suffered  a  loss  of  purchasing  power  of  about  25%  per 
annum.  Consequently  bondholders  not  only  lost  all 
of  their  interest  (of,  say,  5%)  but  20%  per  annum  of 
their  principal  besides  !  The  stockholders,  in  the  same 
period,  have  had  enormous  earnings.  Professor  Friday 
has  shown  that  the  dividends  of  corporations  in  the 
United  States  in  1915-1917  were  eleven  billions  as 
against  seven  and  a  half  billions  in  1911-1913.  This 
increase  of  itself  would  scarcely  keep  pace  with  the 
rising  prices  and  increase  in  number  of  corpora- 
tions. But  there  is  to  be  added  the  fact  that  the 
corporate  reinvestment  in  "surplus"  account  was 
thirteen  billions  in  1915-1917  as  against  four  billions 
in  1911-1913! 

Now,  at  the  end  of  the  war,^  millions  of  people  in  the 
United  States  own  Liberty  Bonds ;  millions  hold  war 
savings  certificates ;  millions  are  financially  interested 
in  the  soldiers'  insurance,  which  totals  about  forty  bil- 
lion   dollars.     And   all   these   are   in   addition  to  the 

*  For  a  brief  discussion  of  the  grave  problem  ahead  of  us  relative 
to  war  debts  and  price  levels,  see  Appendix  I,  §  4. 


Sec.  9]  THE   EVILS  63 

millions  who  already  held  savings  in  banks  or  owned 
mortgages  or  bonds. 

In  Europe,  of  course,  the  shift  between  contracting 
parties  was  even  more  rapid,  because  the  depreciation 
of  their  moneys  went  on  more  swiftly.  The  German 
bondholder  must  have  been  essentially  ruined  and  the 
reported  repudiation  of  the  Russian  debt  only  com- 
pleted openly  a  process  that  had,  under  the  cover  of  in- 
flation, already  gone  far. 

The  total  unjust  shift  of  income  and  principal  (as- 
suming the  present  high  price  level  to  continue)  from 
shrinkage  of  dollars,  pounds,  francs,  and  other  monetary 
yardsticks,  since  1896,  doubtless  exceeds  a  hundred 
billion  dollars,  half  or  more  being  during  the  war. 
Almost  every  year  untold  bilhons  of  dollars'  worth  of 
social  injustice  is  endured. 

One  ultimate  result  (except  so  far  as  a  reverse  move- 
ment may  affect  the  matter)  will  have  been,  in  effect,  to 
extort  the  major  cost  of  the  war  from  widows  and 
orphans,  colleges,  and  hospitals,  savings-bank  deposi- 
tors, salaried  men,  and  wage  earners.  These  are  those 
with  relatively  "  fixed  incomes." 


9.   Uncertainty 


u 


Fixed  incomes  " !  What  a  mockery  inflation  and 
the  consequent  depreciation  of  the  dollar  in  its  purchas- 
ing power  make  of  that  phrase  !  We  who,  through  our 
laws,  guarantee  the  inviolability  of  contracts  and  com- 
pel trustees  to  protect  their  wards  by  investing  trust 
funds  in  such  securities  as  bonds,  permit,  in  fact  some- 
times cause  by  legislation,  the  loss,  it  may  be,  of  half 
of  these  "  inviolable  "  funds. 


64  STABILIZING   THE    DOLLAR  [Chap.  Ill 

Of  course,  if  its  victims  could  clearly  foresee  a  ri^  e 
or  fall  of  the  price  level,  they  would  forestall  it  or  off- 
set it  more  or  less  successfully.  And  this  is  actually 
done  to  a  slight  extent.  When  prices  are  rising  the 
rate  of  interest  usually  rises  a  little  to  compensate  par- 
tially for  the  depreciated  principal.  People  then  real- 
ize that  bonds  are  a  poor  investment  and  so  the  price  of 
bonds  goes  down,  that  is,  the  rate  of  interest  realized 
rises,  while  the  opposite  happens  when  prices  are  falling. ^ 
But  experience  shows  that  this  compensation  is  seldom 
or  never  complete.  Most  people  pay  no  attention  to 
what  has  happened,  much  less  attempt  to  forecast  the 
future  and  to  be  guided  by  their  forecast.  Indeed,  not 
many  can  escape  even  when  they  see  the  breakers 
ahead ;  for  they  are  already  tied  up  by  long-time 
contracts. 

And  the  few  who  do  bother  their  heads  over  price 
movements  are  mostly  professional  speculators.  One  of 
the  consequences  of  a  shifting  price  level  is  speculation. 
The  speculator,  if  he  guesses  right,  makes  money  and 
lets  the  other  fellow  pocket  much  of  the  loss.  And  the 
other  fellow  includes  the  general  public.  The  more  the 
price  level  shifts  and  the  more  difficult  it  is  to  foretell 
it,  the  more  active  will  be  the  speculator.  So  it  was 
that,  after  the  Civil  War,  with  our  fluctuating  green- 
back dollar,  speculation  was  rampant. 

Already,  after  the  World  War,  speculation  has  become 
rampant  again  and  for  the  same  reason.  Unless  we 
stabihze  the  gold  dollar,  it  will  continue.  No  one  really 
knows  now  which  way  prices  will  move.  The  general 
expectation  is,  or  has  been  until  recently,  of  a  fall,  but 

1  See  The  Rate  of  Interest,  Irving  Fisher,  (Macmillan),  1907, 
Chapter  14. 


Sec.  10]  THE    EVILS  65 

great  borrowing,  slowness  of  liquidation  and  of  contrac- 
tion of  war  currencies,  economies  of  gold  use  and  in- 
crease of  deposit  banking  will  tend  to  prevent  it.^ 

The  chief  indictment,  then,  of  our  present  dollar  is 
that  it  is  uncertain.  As  long  as  it  is  used  as  a  measur- 
ing stick,  every  contract  is  necessarily  a  lottery ;  and 
every  contracting  party  is  compelled  to  be  a  gambler 
in  gold  without  his  own  consent. 

Business  is  always  injured  by  uncertainty.  Un- 
certainty paralyzes  effort.  And  uncertainty  in  the 
purchasing  power  of  the  dollar  is  the  worst  of  all 
business  uncertainties.  To  mention  but  one  specific 
instance,  uncertainty  as  to  the  price  level  makes  it  dan- 
gerous to  loan  on  mortgage.  The  banker  fears  that  a 
great  shrinkage  of  farm  values  may  wipe  out  the  margin 
which  protects  his  mortgage  and  so  requires  a  large 
margin.  A  stabler  dollar  would  make  a  smaller  margin 
sufficient,  thus  permitting  the  farmer  to  mortgage  up 
to  a  large  fraction  of  his  farm  value  and  so  helping  him 
and  the  banker  as  well. 

One  of  the  chief  marks  of  a  high  civilization  is  the 
reduction  of  risks  and  the  lessening  of  the  many  perils 
of  life  and  property  to  which  human  beings  are  exposed. 
Judged  by  this  criterion  our  unstable  dollar  is  a  relic  of 
barbarism. 

10.   Trade  Cycles 

One  of  the  results  of  such  uncertainty  is  that  price 
fluctuations  cause  alternate  fluctuations  in  business ; 
that  is,  booms  and  crises,  followed  by  contractions  and 
depressions.     An  upward  price  movement  is  apt  to  end 

1  See  Irving  Fisher,  The  New  Price  Revolution,  Information  and 
Education  Service,  U.  S.  Department  of  Labor,  March,  1919. 

F 


66  STABILIZING   THE    DOLLAR  [Chap.  Ill 

in  a  business  crash,  after  which  there  is  a  long  fall  caus- 
ing an  industrial  depression,  followed  by  another  climb 
to  the  next  crash.  Yet  the  rank  and  file  of  busi- 
ness men  do  not  realize  the  close  connection  between 
these  cycles  of  trade  and  the  instability  of  the  dollar. 

Briefly,  the  process  is  this :  when  prices  rise,  great 
profits  are  made  because,  as  we  have  seen,  the  "  profit- 
eer "  or  stockholder  wins  without  effort  from  the  bond- 
holder and  from  the  employees  on  salary  or  wages.  His 
easy  profits  lead  him  to  "  extend  himself  "until,  when 
interest  charges,  rents,  salaries,  and  wages  do  catch  up, 
his  prosperity  ceases,  he  gets  caught  in  debt,  becomes  a 
bankrupt,  and  involves  others  in  a  chain  of  bankrupt- 
cies. 

A  general  crisis  or  even  panic  may  ensue.  In  fact, 
a  crisis  is  defined  by  Juglar  as  the  culmination  of  an  up- 
ward price  movement,  —  that  is,  of  a  downward  move- 
ment in  the  purchasing  povv^er  of  the  dollar.  Such  crises 
have  followed  the  exaggerated  prosperity  which  often 
comes  shortly  after  a  war  —  for  instance,  after  the  Na- 
poleonic Wars  (in  1818),  the  Crimean  War  (in  1857),  the 
Civil  War  (in  1866),  and  the  Franco-Prussian  War  (in 
1873).  Then  when  prices  fall  the  "  fixed  charges  "  are 
felt  as  a  most  serious  drag  on  business  and  a  depression 
of  trade  follows. 

Yet  it  seldom  occurs  to  business  men  that  business 
thus  staggers  about  because  the  dollar  staggers. 

II.   Resentment  and  Violence 

There  may  be  persons'  who,  at  this  point,  are  in- 
clined to  make  the  smug  observation  that  what  we 
don't  know  we  suffer  we  don't  really  suffer.  But  we 
carmot  take  so  easy-going  a  mind  cure.     On  the  con- 


Sec.  Ill  THE   EVILS  67 

trary,  not  only  are  the  evils  of  the  redistribution  of 
wealth  and  of  the  fluctuations,  booms,  crises,  recessions, 
and  depressions,  which  have  been  described,  very  real, 
but  the  fact  that  people  do  not  understand  them  is 
itself  an  evil.  For  when  people  are  hurt  but  do  not 
know  what  hurts  them,  they  become  suspicious  of  al- 
most everything  and  everybody. 

This  suspicion  some  years  ago  led  to  what  has  been 
known  as  "  muckraking."  Though  many  big  criminals 
were  thus  exposed,  their  machinations  were  scarcely 
enough  to  explain  a  fraction  of  one  per  cent  of  the  evil 
which  our  shifting  dollar  has  done,  and  probably  are 
not  more  than  could  have  been  uncovered  at  almost 
any  time  in  our  history  if  the  same  detective  work 
were  undertaken. 

This  muckraking,  itself  bred  of  discontent  and  sus- 
picion, has  intensified  that  suspicion  and  discontent; 
for  it  has  exhibited  in  the  limelight  of  the  public  press 
the  enormous  profits  made  by  big  business  and  high 
finance,  in  contrast  with  the  pitiful  pay  of  common 
labor.  As  the  late  Dean  Carleton  Parker  of  the  Univ- 
versity  of  Washington  has  said,  this  sort  of  public 
muckraking  has  created  a  fixed  idea  of  grievance  in 
the  minds  of  observant  and  reflecting  workingmen, 
and  has  much  to  do  with  the  growth  and  bitterness  of 
the  "  I.  W.  W." 

Every  rise  in  the  cost  of  living  brings  new  recruits  to 
these  malcontents  who  feel  victimized  by  society  and 
have  come  to  hate  society.  They  cite,  in  their  indict- 
ment, the  high  prices  of  necessities  and  the  high  profits 
of  certain  great  corporations,  both  of  which  they  attrib- 
ute to  deliberate  plundering  by  *'  profiteers  "  or  a  social 
system  of  "  exploitation." 


68  STABILIZING   THE    DOLLAR  [Chap.  Ill 

It  never  occurs  to  them  that  an  impersonal  cause 
could  injure  them  and  help  others,  and  the  idea  of  too 
much  money  they  would  hail  as  a  grim  joke. 

To  resentment  and  class  hatred  are  also  to  be  attrib- 
uted, in  part,  overt  acts  of  violence  and  sabotage  in 
which  sometimes  the  employer's  factory  is  destroyed ; 
and  food  riots  in  which  sometimes  the  retailer's  shop  is 
wrecked. 

12.   Falling  as  well  as  Rising  Prices  Cause 

Discontent 

Resentment  and  suspicion  are  equally  rife  in  periods 
of  falling  prices.  Some  of  us  have  not  forgotten  the 
resentment  of  the  western  farmers  against  Wall  Street 
in  the  nineties,  and  the  suspicion  that  the  farmers'  woes 
and  the  woes  of  poor  debtors,  as  well  as  the  depression 
of  trade,  unemployment,  and  even  the  panic  of  1893, 
were  due  to  the  machinat'ons  of  Wall  Street.  Bryan's 
famous  speech  before  the  Democratic  convention  of 
1896,  which  made  him  the  Democratic  presidential 
nominee,  was  based  on  the  idea  that  the  laborer  and 
the  farmer  were  being  crucified  on  a  "  Cross  of  gold," 
supposedly  due  to  sinister  influences.  The  political 
campaign  of  that  year  was  full  of  allusions  to  the  alleged 
''  Crime  of  '73,"  meaning  the  demonetization  of  silver. 
Populism  at  that  time  took  its  cue  from  the  intolerable 
burden  of  interest,  just  as  socialism  to-day  takes  its  cue 
from  the  intolerable  burden  of  the  high  cost  of  living. 
Recently  a  visitor  in  Kansas  could  find  no  populist. 
The  reason  given  was  that  "  there  is  too  much  money 
now  for  populism."  This  is  an  unconscious  recogni- 
tion of  the  fact  that  the  farmers'  interests  now,  instead 
of  being  injured  as  they  once  were  by  falUng  prices  and 


Sec.  13]  THE   EVILS  69 

increasing  burden  of  mortgages,  are  improving  under 
rising  prices  and  lightened  mortgages.  And  just  as 
populism  stopped  a  few  years  after  the  fall  of  prices 
stopped,  so  will  I.  W.  W.ism  be  arrested  a  few  years 
after  the  arrest  of  the  rise  of  prices. 

13.   War  Prices  Cause  Discontent 

When  the  history  of  the  war  is  written,  it  may  well 
be  that  we  shall  find  that  the  growing  popular  unrest 
caused  by  the  high  cost  of  living,  and  the  atmosphere 
of  suspicion  engendered,  had  something  to  do  in  giving 
a  pretext  for,  if  not  causing,  the  Great  War,  In  fact, 
before  the  war,  rising  costs  of  living  were  fast  making 
socialists  all  over  the  world,  including  Germany,  and  the 
German  government  must  have  weighed,  as  one  of  the 
expected  dynastic  advantages  of  war,  the  suppression 
of  the  growing  internal  class  struggle  which  this  high 
cost  of  living  was  bringing  on  apace. 

And,  when  all  the  evidence  is  in,  it  may  well  be  found 
that  the  desire  of  the  Bolsheviki  to  withdraw  from  the 
war  was  greatly  stimulated  by  the  soaring  prices  from 
Russian  paper  money  inflation,  as  well  as  from  scarcity 
of  commodities. 

Even  in  Germany,  formerly  so  well  disciplined,  there 
was  rioting  during  the  war  because  of  high  prices,  a  part 
of  which  was  certainly  due  to  inflation.  More  recently 
a  keen  observer,  an  American  officer  at  Coblenz,  reports 
that  the  most  plausible  theory  of  the  sudden  collapse 
of  German  morale  was  that  the  German  people  were 
indignant  over  high  prices,  profiteering,  and  grafting. 
The  labor  troubles  in  France  and  England  are  attributed 
to  the  same  cause.     Lord  D'Abernon  says,  according 


70  STABILIZING   THE    DOLLAR  [Chap.  Ill 

to  newspaper  reports,  that  in  his  opinion  80%  of  the 
labor  discontent  of  Europe  is  due  to  this  cause.  The 
labor  discontent  following  the  war  is  worldwide  because 
the  rise  of  prices  is  worldwide.  This  discontent  is  not 
confined  to  the  countries  which  were  actually  engaged 
in  the  war,  but  is  found  in  out-of-the-way  places  like 
Portugal  and  even  in  far-away  New  Zealand,  once 
called  "  the  land  without  strikes  "  but  now  afflicted 
with  strikes  because  strikes  seemed  necessary  to  enable 
wages  to  overtake  the  high  cost  of  Uving.^ 

If  I  am  not  greatly  mistaken,  further  trouble  is  now 
brewing  over  high  prices.  While  the  war  lasted  it  served, 
and  properly,  as  an  excuse  and  explanation.  But  now 
that  the  war  is  over,  the  high  prices  seem,  to  many, 
inexcusable.  If,  as  I  anticipate,  prices  remain  at  high 
levels  and  the  public  fails  to  see  why,  they  will  wish  to 
wreak  vengeance,  some  on  one  luckless  object  of  their 
wrath,  some  on  others — profiteers,  landlords,  employers, 
speculators,  middlemen,  retailers,  trusts,  railways, 
labor  unions,  etc.  If  the  price  level  stays  high,  prof- 
iteering will  increase  —  as  an  effect  not  a  cause. 

One  result  which  will  probably  occur  will  both  sur- 
prise and  anger  the  public.  This  is  a  further  great 
increase  of  earnings  of  industrial  companies  and  a  great 
increase  in  the  value  of  their  common  stocks.  For,  if 
prices  are  to  stay  double  what  they  were  before  the  war, 
gross  earnings  will  tend  to  double  and,  after  deducting 
the  "  fixed  "  interest,  rent,  and  dividends  on  preferred 
stock,  the  net  earnings  accruing  to  common  stock  will 

1  Intelligent  business  men  in  New  Zealand  understand  that  the 
basic  cause  of  this  reappearance  of  labor  troubles  is  the  depreciation 
of  money,  and,  as  a  consequence,  the  New  Zealand  Board  of  Trade 
is  now  seriously  considering  the  introduction  of  the  plan  for  stabili- 
zation of  money  here  proposed. 


Sec.  14]  THE    EVILS  71 

tend  to  more  than  double.  The  I.  W.  W.  and  other 
radicals  will  put  their  own  interpretation  on  such  pros- 
perity of  "  Wall  Street,"  the  figures  of  which  they  are 
always  watching.  They  will  be  right  in  thinking  that 
the  high  profits  represent  social  injustice.  What  they 
do  not  realize  is  that  the  injustice  is  chiefly  against  the 
bondholders,  and  that  the  transfer  between  these  two 
classes  of  investors  is  an  effect  of  raised  prices,  not  their 
cause. 

14.   Adjustments  Most  Needed,  the  Most 
Unpopular 

One  of  the  most  interesting  and  curious  by-products 
of  the  maladjustments  we  have  seen  and  of  the  misun- 
derstandings of  the  nature  of  the  process  is  that  the 
public  is  most  angry  at  those  latest  to  seek  relief  by 
higher  prices,  the  very  ones  who  need  relief  most. 

It  was  this  mental  attitude  on  the  part  of  the  public 
which  so  long  prevented  a  rise  in  railway  rates.  The 
Interstate  Commerce  Commission,  consciously  or  un- 
consciously, reflected  public  opinion  when,  prior  to 
the  war,  it  refused  repeated  requests  for  relief  through 
a  rise  of  rates.  The  public,  instead  of  seeing  in  the 
general  rise  of  prices  a  depreciation  of  the  dollar  and 
the  consequent  need  of  a  prompt  and  corresponding  rise 
in  such  prices  as  had  remained  unadjusted  to  the 
cheaper  dollar,  demanded  indignantly,  "  Haven't  we 
suffered  enough  already  from  the  high  cost  of  living? 
While  we  are  protesting  against  the  other  conspirators 
who  are  raising  prices  and  while  we  are  trying  to  force 
them  to  reduce  prices,  we  certainly  won't  permit  this 
further  addition  to  the  high  cost  of  living."  In  thus 
thinking  of  their  own  grievances  they  overlooked  the 


72  STABILIZING   THE   DOLLAR  [Chap.  Ill 

fact  that  the  railways  had  been  more  long-suffering 
than  themselves. 

Until  Mr.  McAdoo,  as  director-general  of  railways 
in  the  war,  raised  the  rates  in  1918,  they  had  been  prac- 
tically unchanged  since  1896.  Even  including  the  ad- 
vances of  1918,  freight  and  passenger  rates  are  but  12 
and  20%  higher,  ^  respectively,  than  they  were  in  1896 
while  the  price  level  has  risen  200% ! 

The  same  strong  public  feeling  long  prevented  a  rise 
in  the  fares  of  electric  railway  companies  above  the 
traditional  five  cents. 

If  a  five-cent  fare  was  just  in  1896  and  if  the  other 
factors  in  the  case,  wages,  material,  equipment,  etc., 
have,  on  the  average,  risen  proportionally  with  the  gen- 
eral rise  in  prices,  that  is,  are  three  times  what  they 
were  in  1896,  then  the  "  fair  fare  "  for  the  companies 
to-day  should  be  fifteen  cents !  Or,  if  to-day  a  five-cent 
fare  is  just  and  expenses  in  1896  were  lower  than  now 
in  proportion  to  prices  in  general,  the  just  fare  in  1896 
should  have  been  about  two  cents ! 

In  the  same  way  tenants  have  deeply  resented  the 
rise  of  rents,  long  belated  though  it  was.  Rents  did 
not  respond  to  the  rise  in  general  prices  for  many  years, 
in  fact  were,  in  some  cases  in  Europe,  temporarily  re- 
mitted on  the  principle  of  the  moratorium.  When 
finally  they  did  respond,  they  went  up  suddenly  and, 
to  the  tenant  already  long  injured  by  the  high  cost  of 
living,  the  rent  raising  seemed  ''  the  most  unkindest 
cut  of  all."  As  this  book  is  being  written  the  "  rent 
profiteer  "  in  Europe  is  being  lampooned,  insulted,  and 
even  stoned. 

1  See  Theodore  H.  Price,  "The  Index  Number  Wage,"  Commerce 
and  Finance,  May  7,  1919. 


Sec.  14]  THE   EVILS  73 

Even  more  curious  is  the  fact  that  the  beneficiaries 
of  high  prices  are  themselves  indignant  over  the  high 
prices  charged  by  others.  Employers  who  are  getting 
high  prices  and  high  profits  often  object  strenuously  to 
raising  wages  and  salaries.  Farmers  who  are  getting 
high  prices  protest  vigorously  against  paying  high 
prices. 

There  is  a  true  story  which  illustrates  this.  A  farmer 
inquired  from  the  manufacturer  the  present  price  of  a 
certain  type  of  buggy  such  as  he  had  bought  once  before. 
The  price  quoted  seemed  to  him  outrageously  high  and 
he  accused  the  manufacturer  of  "  profiteering,"  remind- 
ing him  of  what  the  former  price  of  this  buggy  had  been. 
The  manufacturer,  after  looking  up  the  record  of  the 
transaction,  and  discovering  that  the  farmer  had  pre- 
viously paid  for  such  a  buggy  by  a  shipment  of  wheat, 
reckoned  at  the  low  prices  then  prevailing,  replied  :  ''  If 
you  will  ship  to  me  for  the  new  buggy  the  same  amount 
of  wheat  you  shipped  for  your  old  one,  I  will  gladly 
ship  the  buggy  and  in  addition  will  ship  you  a  piece  of 
household  furniture  and  a  good  kitchen  stove !  " 

In  short,  everybody  is  eager  to  take  advantage  of 
rising  prices,  but  feels  aggrieved  if  anybody  else 
snatches  the  advantage  away.  Thus  the  high  cost  of 
Uving  becomes  a  veritable  "  apple  of  discord." 

If  high  prices  have  come  to  stay,  of  course  the  sooner 
all  the  adjustments  are  made  the  better.  "Wages  espe- 
cially need  to  be  raised,  as  do  salaries,  rents,  and  the 
rates  of  public  service  corporations.  It  will  probably 
be  less  disturbing,  on  the  whole,  to  level  up  the  few  such 
tilings  than  to  level  down  the  many  other  things. 


74  STABILIZING   THE   DOLLAR  [Chap.  Ill 

15.   Bad  Remedies 

In  short,  either  a  rising  or  a  falHng  price  level  wrongs 
great  classes  of  society  and  brings  discontent,  suspicion, 
and  violence.  The  public  fails  to  discern  the  great 
cause  lying  back  of  all  the  trouble  ;  but  it  detects,  almost 
unerringly,  "  who's  got  the  money  "  and,  though  less 
unerringly,  at  whose  expense.  It  demands  a  remedy 
without  first  knowing  the  correct  diagnosis. 

Thus  any  price  disturbance  gives  a  hearing  to  all 
manner  of  reform  movements,  whether  apropos  or  irrel- 
evant and  whether  good,  bad,  or  indifferent.  For 
instance,  Henry  George's  single-tax  propaganda  was 
aided  both  by  falling  and  rising  prices.  During  the 
falling  prices  there  was  the  spectacle  of  the  tenant  op- 
pressed by  an  increasing  burden  of  rent  and  the  inde- 
pendent farmer  oppressed  by  an  increasing  burden  of 
interest.  These  evils  thrust  the  ''  land  problem  "  for- 
ward, especially  in  Ireland  and  Kansas,  and  any  pro- 
posal to  solve  the  land  problem  got  a  ready  hearing. 

When,  later,  prices  rose  it  was  natural  to  attribute 
this  rise  to  pressure  of  population  for  subsistence  on  the 
margin  of  cultivation,  especially  as  by  the  time  this 
theory  was  urged  the  belated  rise  of  rents  and  of  land 
values  began.  The  high  cost  of  living  seemed  explain- 
able by  high  real  estate  values  and  raised  land  rents,  and 
indignation  against  the  system  of  private  ownership  of 
land  was  readily  aroused,  especially  as  numerous  in- 
stances were  at  hand  of  great  fortunes  made  from  the 
unearned  increment  and  of  land  frauds,  land  grabs,  and 
exploitation  by  great  corporations  of  natural  resources. 

Not  all  the  reforms  which  thus  get  factitious  help 
from  price  movements  are  genuine  reforms. 


Sec.  15]  THE    EVILS  75 

The  fact  is  that  among  the  worst  consequences  of 
price  convulsions  are  the  vicious  remedies  proposed. 
Like  the  remedies  of  primitive  medicine,  they  are  often 
not  only  futile,  but  harmful.  Yet  the  patient  will 
always  demand  medicine.  The  let-alone  policy  will 
not  do  for  him.  He  knows  that  the  present  condition 
of  things  is  bad  and  needs  changing.  His  attitude  of 
mind  is  a  frantic  "  I  don't  know  exactly  what's  the 
matter  or  what  needs  to  be  done,  but  for  Heaven's 
sake  let's  do  something."  It  is  clear,  then,  that  unless  a 
scientific  remedy  is  found  and  applied  there  is  always 
great  danger  of  quack  remedies. 

In  the  nineties,  after  a  prolonged  fall  of  prices,  which 
had  begun  in  the  seventies,  when  so  much  was  said  of 
the  so-called  "  Crime  of  '73,"  several  unscientific  reme- 
dies were  on  the  market.  A  book  that  went  by  the 
name  of  "  Coin's  Financial  School  "  proposed  the  coin- 
ing of  all  silver  brought  to  the  mint  into  silver  dollars,  each 
sixteen  times  as  heavy  as  the  gold  dollar,  although  at  that 
time  a  gold  dollar  would  buy  in  the  market  not  sixteen 
times,  but  about  thirty-two  times,  its  weight  in  silver. 
This  book  had  a  phenomenal  circulation  and  influence ; 
and  the  "  16  to  1  "  remedy,  which  would  have  been 
worse  than  the  disease,  came  very  near  being  adopted. 
The  movement  for  it  was  based  on  a  consciousness  of 
the  true  cause  of  the  falling  prices  —  inadequate  gold  ; 
but,  instead  of  regarding  this  impersonally  and  seeking 
merely  to  prevent  further  fluctuation,  the  "  free  silver  " 
advocates  put  the  blame  on  the  ''  gold  bugs  of  Wall 
Street  "  and  sought  to  "  get  even  "  by  a  sudden  debase- 
ment of  the  dollar  equal  to  fifty  per  cent. 

Since  then,  of  course,  we  have  witnessed,  in  gold  it- 
self, more  than  this  amount  of  depreciation,  —  a  gold 


76  STABILIZING   THE    DOLLAR  [Chap.  Ill 

dollar  to-day  being  worth  scarcely  a  third  of  what  the 
gold  dollar  of  1896  was  worth.  Yet  who  thinks  of  that 
depreciation  as  atoning  for  the  "  Crime  of  73  "  !  On 
the  contrary,  we  regard  that  depreciation  (as  shown 
in  the  rising  price  level)  as  but  another  evil.  We 
now  wish  to  find  a  remedy  for  it  as  well ;  and  so  to-day 
we  are  being  threatened  with  other  unscientific  reme- 
dies, such  as  revolutionary  sociahsm,  syndicahsm,  and 
Bolshevism.  Reckless  radicalism  rides  in  on  the  wave 
of  high  prices. 

1 6.   The  Loss  Is  General 

We  have  seen  that  the  primary  evil  of  these  aberra- 
tions is  social  injustice,  a  sort  of  subtle  pocket  picking. 
At  first  glance  it  might  seem  that  such  a  transfer  is 
not  a  general  evil ;  for  what  some  lose  others  seem  to 
gain,  and  they  do  —  at  first.  But  the  secondary  evils 
are  very  general,  namely,  the  evils  from  specula- 
tion, uncertainty,  crises,  depression,  resentment,  vio- 
lence, ill-considered  ''  remedies."  Moreover,  curiously 
enough,  as  with  ordinary  gambling,  even  the  ill-gotten 
gains  of  the  winners  are  largely  swept  away  in  the  end. 
Thus,  as  during  the  present  rise  of  prices,  strikes,  riots, 
violence,  and  the  other  secondary  effects  of  rising  prices 
destroy  the  profits  of  the  winners  by  blocking  the  wheels 
of  industry  and  even  destroying  its  tools.  If  we  are 
going  to  have  discontented  workmen  smash  our  win- 
dows and  run  the  wooden  shoe  through  our  machinery, 
it  is  not  so  much  a  question  of  who  is  going  to  get  the 
profits  as  a  question  of  whether  there  are  to  be  any 
profits.  If  we  want  workmen  to  be  contented,  we 
must  let  them  have  a  fair  share  of  prosperity  and  not 
let  a  shrinking  dollar  defraud  them. 


Sec.  16]  THE    EVILS  77 

Furthermore,  the  crisis  which  follows  the  "  boom  " 
period  is  of  itself  a  day  of  reckoning,  at  which  the  profit- 
taker  pays  dearly  for  his  prosperity. 

Similarly,  during  a  period  of  falling  prices,  when  the 
vampire  is  not  the  profit-taker  but  the  creditor,  the 
winner  is  also  apt  to  lose  his  winnings  when,  as  was 
shown  in  §  10  above,  the  stipulated  interest  he  exacts 
grows  into  an  intolerable  burden  and  bankrupts  the 
debtor.  A  special  injury  to  business  comes  when  the 
creditor  forecloses  his  mortgage  on  industry  and  under- 
takes to  run  it  himself.  The  creditor  —  especially  the 
ordinary  bondholder  —  is,  usually  and  normally,  the 
simple  investor  of  capital,  the  "  silent  partner  "  in 
business.  He  lacks  the  temperament  and  training  to 
be  a  captain  of  industry.  Nevertheless,  after  years  of 
falling  prices  during  which  he  has  been  draining,  unob- 
served, the  life  blood  of  the  enterprise  whose  bonds  he 
holds,  until  there  is  no  profit  left  for  the  captain  of 
industry  who  has  been  managing  it,  the  mortgage  is 
foreclosed  and  the  captain,  held  responsible  for  the 
shipwreck,  is  forced  out,  discredited,  and  humiUated, 
and  wholly  unable  to  articulate  or  even  to  understand 
that  it  was  not  wholly  his  fault,  if  at  all,  but  the  fault 
of  his  instrument  of  reckoning,  the  dollar.  Thereupon 
the  bondholder  is  forced  to  take  control.  Thus  the 
management  drifts  into  wrong  hands,  turns  into  mis- 
management, and  the  bondholder  is  hoist  with  his  own 
petard.  Like  Shylock,  though  unconsciously,  he  has 
been  exacting  his  pound  of  flesh  until  he  has  over- 
reached himself.  As  David  Harum  wisely  said,  ''  It 
ain't  a  bad  idee  to  be  willin'  to  let  the  other  feller 
make  a  dollar  once  'n  a  while." 

The  wage  earner  also  is  involved  in  the  catastrophe. 


78  STABILIZING   THE   DOLLAR  [Chap.  Ill 

Primarily  a  gainer  when  prices  are  falling,  because  his 
wages  fall  more  slowly  than  prices,  he  nevertheless 
suffers  more  unemployment  during  this  lowered  cost 
of  hving  than  during  rising  prices,  and  in  the  misman- 
agement, at  the  end,  he  suffers  with  the  rest. 

In  short,  almost  no  one  gains  long  or  gains  much 
either  from  rising  prices  or  from  falling  prices.  To 
society  as  a  whole,  there  is,  in  either  case,  a  great  net 
economic  loss  as  well  as  great  injury  to  social  justice 
and  good  will. 

17.    Conclusion 

Thus  this  seemingly  simple  little  matter  of  shorten- 
ing or  lengthening  the  monetary  yardstick,  so  far  from 
being  a  merely  nominal  and  unimportant  change,  is 
really  more  or  less  responsible  for  some  of  the  greatest 
events  in  history.^  It  causes  mighty  convulsions  of 
prices  and  these,  directly  or  indirectly,  rock  the  social 
structure  to  its  foundation. 

1  Besides  the  effects  of  price  movements  above  cited,  which  are 
specifically  evil,  history  is  fuU  of  other  great  effects,  —  some  even 
beneficent.  Price  movements,  like  wars,  inevitably  arouse,  irritate, 
stimulate.  Falling  prices  stimulated  the  great  Irish  land  agitation 
and  the  Home-rule  movement  because  of  the  pitiable  condition  of 
the  Irish  peasant  debtors.  Falling  prices  stimulated  the  idea  of 
Protective  tariffs.  Rising  prices  stimulated  the  idea  of  Free  Trade. 
England  abolished  the  corn  laws  when  the  cost  of  living  was  rising, 
and  under  the  same  whip  the  United  States  adopted  the  Underwood 
low  tariff  and,  earlier,  the  low  tariff  of  1857.  It  was  as  an  antidote 
for  the  falling  prices  of  the  '20s  and  the  '90s  that  the  doctrine  of 
protection  scored  its  greatest  successes  in  the  United  States.  Not 
only  economic  history  but  political  and  social  history  would  have 
been  totally  different  had  it  not  been  for  the  aberrations  of  monetary 
units. 


CHAPTER  IV 

A   REMEDY 

I.   Remedies  Which  Have  Been  Proposed 

We  are  now  ready  for  the  practical  question  for 
which  this  book  was  written,  '^  What  are  we  going  to 
do  about  it?  " 

The  following  is  a  list  of  the  measures  to  stabilize 
prices  which  I  have  seen  in  the  last  ten  years,  a  few 
of  which  have,  in  some  places,  been  adopted :  parcel 
post ;  farm  loan  facilities  ;  workmen's  compensation  ; 
other  forms  of  social  insurance ;  Government  owner- 
ship of  public  utilities ;  sociahsm,  of  every  variety ;  re- 
duction of  human  disease  and  disability ;  prohibition ; 
"  the  simple  life,"  including  abandonment  of  social 
obligations  and  "  emigration  "  to  a  different  part  of 
town  (as  in  the  book,  "  One  Way  Out  ") ;  house- 
keepers' market  clubs ;  municipal  slaughter  houses ; 
state  bakeries  and  butcher  shops ;  trolley  freight  serv- 
ice ;  cooperative  selling  by  farmers ;  utilization  of  empty 
city  lots ;  municipal  markets  ;  scientific  management ; 
reduction  of  middlemen  ;  cooperation ;  profit-sharing  ; 
publicity  as  to  prices  and  profits ;  the  single  tax ; 
lower  tariffs  (in  the  United  States  and  Germany)  ; 
higher  tariffs  (in  England) ;  better  supervision  of 
weights  and  measures;  use  of  bulk  goods  instead 
of  package  goods ;  use  of  "  cash  and  carry  "  system, 
instead  of  "  telephone  and  deliver  " ;  repeal  of  tax  on 

79 


80  STABILIZING   THE    DOLLAR  [Chap.  IV 

oleomargarine  and  other  taxes  on  consumption ;  re- 
duction of  railway  rates  (in  France),  namely,  on  vege- 
tables and  fresh  fish,  with  increase  of  rates  on  fodder 
for  export  (the  idea  being  to  keep  fodder  at  home  and 
make  meat  cheaper),  and  certain  encouragements  to 
importation  of  cattle  from  Algeria,  Tunis,  and  else- 
where; encouragement  (in  Switzerland)  of  import  of 
frozen  meats  from  Uruguay ;  municipal  selling  of 
potatoes,  fish,  and  certain  other  foods  at  cost ;  laws 
against  speculation  and  monopoly ;  price  fixing ;  regu- 
lation of  cold  storage  plants  (in  the  United  States) ; 
granting  of  subsidies  to  cold  storage  plants  (in  France) ; 
general  food  control  by  the  Government ;  publicity  as  to 
prices  and  profits  ;  trade  unionism ;  the  destruction  of 
trade  unions ;  inflation  ;  elastic  currency  ;  bimetal- 
lism; sliding  scale  of  wages  based  on  cost  of  living; 
disarmament. 

Much  as  I  should  like  to,  I  shall  not  take  space  to 
discuss  these  proposals  in  detail.  Some  of  them  have 
already  been  mentioned  as  evils  rather  than  remedies. 
Others,  though  most  excellent  in  themselves,  are 
irrelevant  to  the  problem  of  this  book ;  that  is,  they 
would  not  tend  in  the  least  to  stabilize  the  price  level 
and  the  purchasing  power  of  money.  They  would 
help  us  to  endure  the  high  cost  of  living  but  would  not 
reduce  or  prevent  it.  Some  of  them  may  even  be 
more  important  to  the  sum  of  human  happiness  than 
the  remedy  about  to  be  proposed.  That  remedy  is  not 
in  the  least  in  conflict  with  such  measures  but  supple- 
mentary to  them. 

The  above  list  of  proposals  is  given,  therefore,  not 
for  indiscriminate  condemnation,  but  as  showing  in 
what  direction  people  tend  to  think  when  the  problem 


Sec.  2]  A   REMEDY  81 

of  the  high  cost  of  Hving  is  mentioned.  The  fact  that 
such  proposals  are  mostly  concerned  with  economy 
and  efficiency  in  the  production,  distribution,  and  con- 
sumption of  goods  shows  that  little  thought  is  ordi- 
narily given  to  the  other  side  of  the  market,  i.e.  to  the 
monetary  aspect  of  the  question. 

There  are  really  two  problems  included  under  "  the 
high  cost  of  living  "  :  (1)  the  problem  of  the  size  of 
our  incomes ;  and  (2)  the  problem  of  how  much  each 
dollar  of  our  incomes  will  buy.  The  first  of  these  is 
more  properly  "  the  problem  of  income";  the  second 
alone  is  strictly  the  problem  of  "  the  high  cost  of  Hving." 

One  trouble  with  most  of  the  proposals  above  men- 
tioned is  that,  though  they  are  concerned  with  the  first 
problem  rather  than  the  second,  they  are  expected  to 
solve  the  second  problem  too.  Disappointment  fol- 
lows their  application,  and  unless  a  genuine  solution  of 
this  second  problem,  i.e.  an  effective  means  of  stabiliz- 
ing the  price  level,  is  found,  a  bewildered  and  infuri- 
ated public  is  apt  to  keep  on  trying  every  sort  of 
alleged  remedy,  good,  bad,  and  indifferent,  often  with 
disastrous  results.  The  plan  which  I  shall  propose  has 
reference  solely  to  the  solution  of  this  second  problem, 
—  the  problem  of  the  purchasing  power  of  the  dollar. 

2.   The  Dollar  the  Only  Unit  as  Yet  Unstandardized 

The  real  culprit  being  the  dollar,  the  real  remedy  is 
to  fix  the  purchasing  power  of  the  dollar. 

Our  dollar  is  now  simply  a  fixed  weight  of  gold  —  a 
unit  of  weight,  masquerading  as  a  unit  of  value.  A 
twentieth  of  an  ounce  of  gold  ^  is  no  more  truly  a  unit  of 

^  To  be  exact,  the  fine  gold  in  a  dollar  is  of  an  ounce. 

20.67 

G 


82  STABILIZING   THE   DOLLAR  [Chap.  IV 

value  or  general  purchasing  power  than  is  a  pound  of 
sugar  or  a  dozen  eggs.  It  is  almost  as  absurd  to  define 
a  unit  of  value,  or  general  purchasing  power,  in  terms  of 
weight,  as  to  define  a  unit  of  length  in  terms  of  weight, 
to  define  a  yardstick  as,  let  us  say,  any  stick  which 
weighs  an  ounce. 

What  good  does  it  do  us  to  be  assured  that  our 
dollar  weighs  just  as  much  as  ever?  Does  this  fact 
help  us  in  the  least  to  bear  the  high  cost  of  living? 
What  we  really  want  to  know  is  whether  the  dollar 
buys  as  much  as  ever.  We  want  a  dollar  which  will 
always  buy  the  same  aggregate  quantity  of  bread, 
butter,  beef,  bacon,  beans,  sugar,  clothing,  fuel,  and 
the  other  essential  things  for  which  we  spend  it. 

There  used  to  be  a  song  about  a  shopkeeper  who, 
being  asked  the  price  of  a  box  of  socks,  replied,  "  One 
dollar  a  box."  "  I'll  take  the  box,"  said  the  customer, 
handing  over  his  dollar ;  whereupon  the  shopkeeper 
took  out  the  socks  and  handed  over  the  box.  "  I  sold 
you  the  box,  not  the  socks,"  said  he! 

Our  dollar  is  somewhat  like  that  box.  It  keeps  its 
form,  but  loses  its  content.  The  removal,  in  this  case, 
is  not  intentional  or  conunitted  by  one  of  the  parties  to 
the  contract,  but  so  much  the  worse !  —  for  the  in- 
jured party  has  no  recourse.  It  is  as  though  the 
buyer  of  the  box  of  socks  were  forced  to  agree  in 
advance  to  let  a  bystander  remove  or  insert  socks  ad 
libitum. 

What  is  needed  is  to  stabilize,  or  standardize,  the 
dollar  just  as  we  have  already  standardized  the  yard- 
stick, the  pound  weight,  the  bushel  basket,  the  pint 
cup,  the  horsepower,  the  volt,  and  indeed  all  the 
units  of  commerce  except  the  dollar.     All  these  units  of 


Sec.  2]  A   REMEDY  83 

commerce  have  passed  through  the  evolution  from  the 
rough-and-ready  units  of  primitive  times  to  the  accurate 
ones  of  to-day,  when  modern  science  puts  the  finest 
possible  point  on  measurements  of  all  kinds. 

Once  the  yard  was  defined,  in  a  rough-and-ready  way, 
as  the  girth  of  the  chieftain  of  the  tribe  and  was  called 
a  gird.  Later  it  was  the  length  of  the  arm  of  Henry  the 
First  and,  still  later,  the  length  of  a  bar  of  iron  in  the 
Tower  of  London.  To-day  we  have  at  Washington  a 
Bureau  of  Standards  where  the  modern  yardstick  is 
determined  by  a  bar  of  metal  alloy  kept  in  a  room  of 
constant  temperature,  under  a  glass  case,  and  not  ap- 
proached by  the  observer,  lest  the  warmth  of  his  body 
should  cause  it  to  vary,  but  sighted  by  a  telescope 
across  the  room ! 

Except  the  dollar,  none  of  the  old  rough-and-ready 
units  are  any  longer  considered  good  enough  for  mod- 
ern business.  The  dollar  is  the  only  survival  of  those 
primitive  crudities.  Imagine  the  modern  American 
business  man  tolerating  a  yard  defined  as  the  girth  of  the 
President  of  the  United  States !  Suppose  contracts  in 
yards  of  cloth  to  be  now  fulfilled  which  had  been  made 
in  Mr.  Taft's  administration ! 

And  yet  the  shrinkage  in  such  a  yardstick  would  be 
no  greater  than  the  shrinkage  we  have  suffered  in  the 
far  more  important  yardstick  of  commerce,  the  dollar ; 
and  this  yardstick  is  used  in  all  the  contracts  in  which 
the  yardstick  of  length  is  named  and  in  all  others 
besides ! 

Consequently  the  evils  our  unstabilized  dollar  works 
—  evils  of  confusion,  uncertainty,  social  injustice,  dis- 
content, and  disorder  —  are  as  vast  as  would  be  the 
evils  experienced  if  all  the  other  units  of  commerce  — 


84  STABILIZING   THE   DOLLAR  [Chap.  IV 

the  yardstick,  the  bushel  basket,  the  hour  of  work,  etc. 
—  should  vary  concertedly  to  the  same  extent. 

We  tolerate  our  erratic  dollar  only  because  the  havoc 
it  plays  is  attributed  to  other  agencies.  If  its  victims 
knew  the  truth  about  the  dollar,  it  would  be  stabilized 
at  the  very  next  session  of  Congress. 

We  tenaciously  cling  to  the  blissful  assumption  that 
our  dollar  never  varies.  We  seem  to  like  not  only,  as 
Barnum  said,  to  be  humbugged,  but  even  to  humbug 
ourselves. 

3.   An  Imaginary  Goods-Dollar 

A  true  standard  of  value  (general  purchasing  power 
over  commodities)  such  as  we  would  like  our  mone- 
tary standard  to  be  should  not  be  dependent  on 
one  commodity  merely,  whether  that  commodity 
be  gold  or  silver  or  wheat  or  any  other  single  sort  of 
goods. 

Two  commodities  would  be  better  than  one,  just 
as  two  tipsy  men  walk  more  steadily  arm  in  arm  than 
separately.  Whenever  they  tend  to  lurch  in  opposite 
directions  they  neutralize  each  other.  This  is  the 
argument  which  used  to  be  urged  for  bimetallism, 
symmetallism,  and  other  plans  for  uniting  gold  and 
silver.  And  the  argument  applies  whenever  gold  and 
silver  move  in  opposite  directions,  as  from  1873  to  1896. 
If,  for  instance,  a  generation  ago,  we  had  adopted  a 
dollar  of  an  alloy  ^  consisting  of  half  of  the  former  gold 
dollar  and  half  of  the  former  silver  dollar,  our  price 
level  would  not  have  suffered  the  rapid  fall  it  did  prior 

^  A  bill  for  this  purpose  was  actually  proposed  in  1879  by  Con- 
gressman Stephens  (Hepburn,  History  of  Currency  in  the  United  States, 
p.  288). 


Sec.  3]  A   REMEDY  85 

to  1896  in  common  with  the  price  levels  of  other  gold- 
standard  countries,  nor  would  it  have  suffered  the  rapid 
rise  which  the  units  of  silver-standard  countries  experi- 
enced. It  would  have  kept  intermediate  between  the 
diverging  price  movements  of  gold  countries,  on  the  one 
hand,  and  silver  countries,  on  the  other. 

But  such  an  alloy  of  only  two  commodities,  while 
in  many  cases  it  would  be  steadier  than  either  one 
alone,  and  in  all  cases  steadier  than  the  less  steady  of 
the  two,  would  not  really  be  very  steady. 

A  composite  of  gold,  silver,  copper,  platinum,  and  all 
the  other  metals  would  be  somewhat  more  stable  than 
an  alloy  of  two,  just  as  a  number  of  tipsy  men  can  walk 
more  steadily  arm  in  arm  than  two  only,  it  being 
wholly  unlikely  that  all  men  in  the  line  will  lurch  in  the 
same  direction  at  the  same  instant.  The  lurching  of 
some  in  one  direction  can  almost  always  be  depended 
on  to  offset  materially  the  lurching  of  others  in  the 
other  direction.  We  can  usually  trust  to  chance  if 
there  are  enough  chances  to  trust  to  ! 

But  why  use  metals  exclusively?  The  index  num- 
bers of  the  United  States  Bureau  of  Labor  Statistics 
show  that  the  group  of  "  metals  and  metal  products," 
taken  as  a  whole,  is  the  most  erratic  of  all  the  groups  ^ 
of  commodities. 

In  order  to  secure  a  dollar  constant  in  its  purchasing 
power  over  goods  in  general,  it  should  represent  a  com- 
posite of  those  very  goods  in  general.  We  should  there- 
fore make  our  gold  dollar  correspond  in  value  to  an 
imaginary  composite  goods-dollar  consisting,  say,  of: 

1  The  groups  are  nine,  namely :  farm  products ;  food,  etc. ; 
cloths  and  clothing  ;  fuel  and  lighting ;  metals  and  metal  products ; 
lumber  and  building  materials ;  drugs  and  chemicals ;  house  fur- 
nishing goods ;   and  miscellaneous. 


86  STABILIZING   THE    DOLLAR  [Chap.  IV 

1  board  foot  of  lumber  (made  up  of  various 
kinds  as  would  be  the  case  with  other  com- 
modities) 

■io  of  a  bushel  of  wheat 

|-  of  a  pound  of  steers 

T  of  a  pound  of  meat 

15  pounds  of  coal 

■^  of  a  barrel  of  wheat  flour 

^  of  a  pound  of  sugar 

i  of  a  pound  of  hogs 

■I  of  a  pound  of  cotton 

■g^  of  a  gallon  of  petroleum 

i  of  an  egg 

|-  of  a  pint  of  milk 

^  of  an  ounce  of  butter 

^  of  a  bushel  of  corn 

■^  of  a  bushel  of  potatoes 

2"^  of  a  pair  of  shoes 

f  of  a  pound  of  hay 

i  of  an  ounce  of  steers'  hides 

^  of  an  ounce  of  tobacco  at  the  farm 

i  of  an  ounce  of  manufactured  tobacco 

f  of  an  ounce  of  lard 

i  of  an  ounce  of  leather 

-YE  of  an  ounce  of  wool 

■J  of  a  pound  of  steel 

^  of  an  ounce  of  copper 

■^  of  an  ounce  of  rubber 

i  of  1%  of  a  gallon  of  drug  alcohol 

1  ounce  of  soap 
etc.,  etc. 

These  happen  to  be  roughly  the  relative  quantities 
of  some  of  the  commodities  used  by  the  United  States 


Sec.  4]  A   REMEDY  87 

Bureau  of  Labor  Statistics  in  making  up  its  index  num- 
ber of  prices.  The  entire  list,  of  which  the  articles 
specified  are  the  more  important,  is  actually  worth 
about  one  dollar  to-day. 

If  we  could,  in  some  way,  make  our  gold  dollar  equiva- 
lent to  such  a  market-basket  dollar,  i.e.  a  composite 
dollar  consisting  of  a  big  basket  or  package  containing 
those  bits  of  goods,  that  composite  basketful  of  com- 
modities—  or  "goods-dollar,"  let  us  call  it  —  would 
evidently  have  to  be  worth  a  dollar  at  all  times ;  and 
the  cost  of  living  —  at  least  the  cost  of  the  repre- 
sentative assortment  in  that  basket  —  could  not  rise  or 
fall.  That  assortment  would  always  cost  a  dollar 
simply  because  a  dollar  was  the  equivalent  of  that 
assortment.  In  short,  it  would  be  just  as  simple  then 
to  keep  the  price  of  the  composite  basketful  of  com- 
modities invariable  (however  widely  its  constituents 
might  vary  among  themselves)  as  it  is  now  to  keep 
the  price  of  gold  invariable.  The  price  of  that  compos- 
ite would  always  be  a  dollar,  just  as  to-day  the  price 
of  gold  is  always  $20.67  an  ounce,  and  just  as,  under  an 
egg  standard,  the  price  of  a  dozen  eggs  would  always  be 
a  dollar,  and  just  as,  with  an  alloy  of  gold  and  silver,  the 
price  of  that  alloy  would  be  constant,  however  much 
its  constituents  might  vary  relatively  to  one  another. 

And  this  composite  goods-dollar  is  not  altogether  a 
joke.  I  am  going  to  suggest  its  adoption  —  indirectly, 
at  least ! 

4.   The  Gold  Standard  Not  to  Be  Abandoned 

Some  literal-minded  reader  is  now  eager  to  point  out 
how  inconvenient,  not  to  say  grotesque,  such  a  market- 
basket  dollar  would  be  if  it  were  in  circulation  or  were 


88  STABILIZING   THE    DOLLAR  [Chap.  IV 

used  for  export  or  import !  With  its  15  lb.  of  coal,  it  is 
far  too  heavy  to  carry ;  with  its  wood  and  hay,  it  is  far 
too  bulky ;  its  half  egg  would  spoil ;  while  to  divide  a 
pair  of  shoes  into  two  hundred  parts  would  annihilate 
their  value.  Gold  is  to  be  preferred  because  it  is  im- 
perishable, easily  divisible,  easily  portable,  and  easily 
salable. 

And  these  are  precisely  the  attributes  which  led  to 
the  selection  of  gold ;  and  not,  as  some  people  mis- 
takenly assume,  any  attribute  of  stabihty. 

By  all  means,  then,  let  us  keep  the  metal  gold  for  the 
good  attributes  it  has  —  portability,  durability,  divisi- 
bility, salability  —  but  let  us  correct  its  instability,  so 
that  one  dollar  of  it  will  at  all  times  buy  approximately 
that  composite  basketful  of  goods.  Under  the  plan 
proposed  only  the  gold  dollar,  duly  corrected,  is  to  be 
actually  handled.  The  goods-dollar  is  merely  a  fiction 
in  terms  of  which  we  may  statistically  test  and  correct 
the  gold  dollar. 

Money  to-day  has  two  great  functions.  It  is  a 
medium  of  exchange  and  it  is  a  standard  of  value. 
Gold  was  chosen  because  it  was  a  good  medium,  not 
because  it  was  a  good  standard. 

The  contention  that  gold  became  money  because  it 
was  thought  to  be  a  good  standard  of  value  is  an  un- 
founded myth.  Indeed,  when  it  came  into  use  as 
money,  there  were  no  index  numbers  and  there  was 
therefore  no  way  of  testing  its  stability  or  instability ; 
and  finally  at  that  time  there  was  not  much  need  and 
not  much  thought  of  a  standard  of  value,  for  the  good 
and  sufficient  reason  that  there  were  few,  if  any,  time- 
contracts,  such  as  promissory  notes,  mortgages,  and 
bonds.     Almost  all  bargains  were  struck  and  settled  on 


Sec.  4]  A   REMEDY  89 

the  spot.  When  a  man  was  about  to  make  a  cash  pur- 
chase it  was  immaterial  to  him  what  the  monetary  unit 
was. 

But  to-day  if  a  man  buys  an  article  and  promises  to 
pay  for  it  in  three  months,  the  case  is  different.  When 
the  time  for  payment  arrives  it  is  very  important  for 
him  to  know  whether  the  "  dollar  "  is  the  same  as  was 
contemplated  when  the  agreement  was  made. 

With  our  modern  contracts,  running  months,  years, 
generations,  or  even  centuries,  including  hundreds  of 
billions  of  dollars'  worth  of  agreements  to  pay  money, 
—  promissory  notes,  mortgages,  debentures,  railway 
bonds,  Government  bonds,  leases,  insurance  contracts, 
etc.,  —  the  function  of  a  standard  of  value,  that  is,  a 
standard  of  deferred  payments,  has  grown  to  be  perhaps 
the  more  important  of  the  two  functions  of  money. 

Yet  because  our  ancestors  found  a  good  medium  of 
exchange  we  now  find  ourselves  saddled  with  a  bad 
standard  of  value.  What  we  need  to  do,  therefore,  is  to 
retain  gold  as  a  good  medium  and  yet  to  make  it  into 
a  good  standard  ;  not  to  abandon  the  gold  standard  but 
to  correct  it ;  not  to  rid  ourselves  of  the  gold  dollar,  but 
to  make  it  conform  in  purchasing  power  to  the  coinposite 
or  goods-dollar. 

Under  the  plan  about  to  be  presented,  gold  is  retained  ; 
and  there  is  essentially  the  same  mechanism  by  which 
it  freely  enters  or  leaves  the  circulation.  But  under 
this  plan  the  gold  dollar  becomes  a  standard  of  value 
instead  of  a  standard  of  weight. 

We  now  have  a  gold  standard  with  the  ''  standard  " 
left  out !  When  I  am  asked  with  a  horrified  air,  whether 
this  proposal  is  not  really  one  to  "  abandon  the  gold 
standard  "  I  like  to  answer :  "  No  !  it  is  to  put  the  stand- 


90  STABILIZING    THE    DOLLAR  [Chap.  IV 

ard  into  the  gold  standard  ! "  But  abandon  the  present 
gold  standard,  so  called,  it  certainly  does,  by  converting 
or  rectifying  it  into  conformity  with  the  composite 
standard. 

5.   Merely  the  Weight  of  the  Gold  Bullion  Dollar 

to  Be  Varied 

But  how  can  we  rectify  the  gold  standard  ?  That  is 
the  question  which  we  set  out  in  this  chapter  to  answer. 
In  brief  the  answer  is  :  hy  varying,  suitably,  the  weight  of 
the  gold  dollar.  The  gold  dollar  is  now  fixed  in  weight 
and  therefore  variable  in  purchasing  power.  What  we 
need  is  a  gold  dollar  fixed  in  purchasing  power  and 
therefore  variable  in  weight. 

I  do  not  think  that  any  sane  man,  whether  or  not 
he  accepts  the  theory  of  money  which  I  accept,^  will 
deny  that  the  weight  of  gold  in  a  dollar  has  a  great  deal 
to  do  with  its  purchasing  power.  More  gold  will  buy 
more  goods.  Therefore,  more  gold  than  23.22  grains 
will,  barring  counteracting  causes,  buy  more  goods  than 
23.22  grains  will  buy.  Therefore  if  the  dollar,  instead 
of  being  23.22  grains,  or  about  one  twentieth  of  an 
ounce  of  gold,  were  an  ounce  or  a  pound  or  a  ton  of  gold, 
it  would,  other  things  equal,  surely  buy  more  than  it 
does  now,  which  is  the  same  thing  as  saying  that  the 
price  level  would  be  lower  than  it  is  now. 

A  Mexican  gold  dollar  weighs  about  half  as  much  as 
ours  and  therefore  has  less  purchasing  power.  If  Mex- 
ico should  adopt  the  same  dollar  that  we  have,  no  one 

*  Thus  B.  M.  Anderson,  Jr.,  probably  the  ablest  writer  among 
the  few  who  still  dissent  from  the  "quantity  theory  "  in  any  form, 
nevertheless  approves  of  the  proposal  to  stabilize  the  value  of  a 
dollar  by  adjusting  its  weight. 


Sec.  61  A  REMEDY  91 

could  doubt  that  its  purchasing  power  would  rise  about 
twofold,  that  is,  the  price  level  in  Mexico  would  fall 
about  half.  Likewise,  if  we  should  adopt  the  Mexican 
dollar,  our  prices  would  about  double. 

Let  it  be  granted,  then,  that  according  as  the  gold 
dollar  is  heavier  or  lighter,  the  more  or  the  less  will  be  its 
purchasing  power.  It  follows  at  once  that,  by  adding 
new  grains  of  gold  to  the  dollar  just  fast  enough  to  com- 
pensate for  a  loss  in  the  purchasing  power  of  each  grain 
(and,  of  course,  reversely,  taking  away  gold  to  compen- 
sate for  a  gain) ,  we  can  secure  a  stationary  instead  of  a 
fluctuating  dollar,  in  terms  of  purchasing  power. 

6.   No  Gold  Coins  to  Be  Used 

Before  the  reader  can  accept  the  statement  just  made 
that  the  problem  of  stabilizing  the  dollar  is  soluble  by 
varying  the  dollar's  weight  he  will  want  to  have  three 
questions  answered :  Is  it  practicable  to  vary  the  gold 
dollar's  weight  periodically?  By  what  criterion  is  the 
variation  to  be  made?  Will  that  variation  actually 
stabilize  the  dollar? 

First,  as  to  the  first  question  :  How  is  it  possible,  in 
practice,  to  change  the  weight  of  the  gold  dollar  or 
other  monetary  unit? 

The  feat  is  certainly  not  impossible ;  for  it  has  often 
been  accomplished.  European  history  affords  numer- 
ous examples.  The  Philippine  peso  was  changed  only 
a  few  years  ago.  We  ourselves  have  changed  the  weight 
of  our  gold  dollar  twice ;  once  in  1834,  when  the  gold 
in  the  dollar  was  reduced  7%,  and  again  in  1837,  when 
it  was  increased  one  tenth  of  one  per  cent.  If  we  can 
change  the  weight  of  a  monetary  unit  once  or  twice  a 
century,  we  can  change  it  once  or  twice  a  month ! 


92  STABILIZING  THE   DOLLAR  [Chap.  IV 

And  if  we  circulate  gold  only  through  paper  repre- 
sentatives redeemable  only  in  gold  bullion  and  dis- 
continue gold  coins,  these  periodical  changes  in  the 
weight  of  the  gold  dollar  can  be  made  even  more  easily 
than  the  occasional  changes  which  history  records. 

In  actual  fact  gold  now  circulates  almost  entirely 
through  paper  ''  yellowbacks,"  or  gold  certificates. 
The  gold  itself  (often  not  in  the  form  of  coins  at  all  but 
of  "  bar  gold  ")  lies  in  the  Government  vaults. 

A  bar  of  gold  bullion,  nine  tenths  fine,  weighing 
25,800  grains,  is  just  as  properly  to  be  called  one  thou- 
sand dollars  of  25.8  grains  each,  as  if  that  bar  were  cut  up 
into  a  hundred  separate  pieces  and  each  were  stamped 
into  a  ten-dollar  gold  piece.  The  thousand  gold  dollars 
already  exist  embedded  or  welded  together  in  that  gold 
bar,  while  the  right  of  ownership  in  them  circulates 
in  the  form  of  paper  "  yellowbacks." 

Since,  then,  even  to-day,  most  of  our  gold  dollars 
do  their  circulating  in  the  form  of  paper,  there  would 
be  no  inconvenience  if  the  only  circulation  of  gold 
were  in  the  form  of  paper.  Most  of  the  people  in  Eng- 
land who,  before  the  war,  carried  gold  in  their  pockets 
by  preference,  have  already  been  weaned  from  the 
habit ;  and  most  of  the  few  Americans  (in  California, 
Oregon,  and  Washington)  who  still  do  so  are  being 
weaned  from  it  in  the  same  way. 

It  would,  therefore,  be  little  more  than  expressing  in 
law  an  existing  custom  if  gold  coins  were  abolished  alto- 
gether. For  simplicity,  let  us  assume  that  this  is  to  be 
done.^  When,  therefore,  I  speak  of  changing,  from  time 
to  time,  the  weight  of  the  gold  dollar,  the  reader  need 
not  conjure  up  visions  of  repeated  recoinages,  or  gold 

*  As  noted  in  Appendix  VI,  §  3,  B,  this  was  proposed  by  Ricardo. 


Sec.  6]  A   REMEDY  93 

eagles  of  various  weights  jangling  together  in  confusion 
in  the  market  place.  Let  him  rather  banish  gold  coins 
entirely  from  his  mind  and  think  of  a  dollar  as  simply 
a  certain  number  of  grains  of  gold  bullion  in  the  vaults 
of  the  United  States  Treasury  —  that  quantity  chang- 
ing from  time  to  time  but  always  definite  and  specific 
at  any  particular  time ;  and  let  him  remember  that,  in 
actual  circulation,  this  gold  bulUon  is  represented  by 
paper  yellowbacks. 

By  thus  assuming  no  actual  gold  coin  to  circulate  but 
all  gold  to  circulate  only  in  the  form  of  paper  represent- 
atives, it  would  be  possible  to  vary  at  will  the  weight  of 
the  gold  dollar  without  any  such  annoyance  or  compli- 
cation as  would  arise  from  the  existence  of  coins.  The 
Government  would  simply  vary  the  quantity  of  gold 
bullion  which  it  would  exchange  for  a  paper  dollar,  — 
the  quantity  it  would  give  or  take  at  a  given  time. 

As  readily  as  a  grocer  can  vary  the  amount  of  sugar 
which  he  will  give  for  a  dollar  the  Government  could 
vary  the  amount  of  gold  it  would  give  or  take  for  a  dollar. 
If  to-day  the  Government  were  giving  25.8  grains  of 
gold  bullion  to  the  jeweler  or  exporter  for  each  dollar 
of  certificates  ^  he  pays  in,  next  month  it  might  give 
26  grains  or  only  24  grains,  the  increases  or  decreases 
being  made,  of  course,  for  the  purpose  of  compensating 

1  The  wording  on  the  certificates  wonld,  of  course,  need  to  be 
slightly  changed.  They  could  no  longer  be  properly  called  ware- 
house receipts,  nor  would  they,  on  the  other  hand,  be  exactly 
analogous  to  Government  notes ;  they  would  be  intermediate  be- 
tween the  two.  They  might  be  described  as  "gold  bullion  dollar 
certificates."  They  would  be  redeemable  at  any  time  in  the  then 
official  weight  of  the  gold  dollar  —  a  variable  weight  but  constant 
worth,  instead  of  a  constant  weight  but  variable  worth,  as  at 
present.  For  the  proposed  wording  of  the  new  certificate,  see 
Appendix  I,  §  10. 


94  STABILIZING   THE    DOLLAR  [Chap.  IV 

for  the  decreases  or  increases  in  the  purchasing  power 
of  the  dollar. 

7.   The  Essentials  of  a  Gold  Standard 

Before  proceeding  to  the  second  question  of  §  6,  we 
may  pause  here  to  point  out  that  the  abolition  of  gold 
coin  would  make  no  material  change  in  the  processes 
by  which  gold  flows  into  and  out  of  circulation.  Gold 
would,  just  as  at  present,  be  brought  by  the  gold  miner 
to  the  Mint  or  the  Assay  Office  or  other  Government 
depository,  and  he  would,  just  as  at  present,  receive 
paper  tokens,  or  yellowbacks,  in  return.  The  only 
difference  would  be  that  he  would  not  always  deposit 
the  same  amount  of  gold  to  get  a  dollar  of  yellowbacks. 
This  sale  of  gold  to  the  Government  for  yellowbacks, 
i.e.  this  unrestricted  deposit,  is  the  essence  of  unrestricted 
coinage  or,  as  it  is  usually  called,  "  free  coinage."  It 
is  thus  that  gold  gets  into  circulation  through  its  repre- 
sentative, the  yellowback. 

Moreover,  to  turn  from  inflow  to  outflow,  gold  would, 
just  as  at  present,  be  taken  out  of  the  Government 
vaults  by  jewelers  or  gold  exporters  and  they  would, 
just  as  at  present,  surrender  yellowbacks  for  that  gold. 
The  only  difference  would  be  that  they  would  not  al- 
ways get  the  same  quantity  of  gold  for  a  dollar  in  yellow- 
backs ;  the  same  certificate  would  be  worth  different 
amounts  of  gold  at  different  times.  Every  dollar  of 
gold  whose  corresponding  yellowback  was  thus  taken 
out  of  circulation,  just  as  at  present,  would  disappear 
into  the  arts  or  foreign  circulation.  The  process  would 
therefore  be  virtually  a  flow  of  gold  dollars  from  the  cir- 
culation into  the  arts  or  abroad.  Such  exchange  is  the 
unrestricted  "  redemption  "  of  the  certificates. 


Sec.  8  A   REMEDY  95 

Thus  unrestricted  deposit  and  unrestricted  redemp- 
tion would  go  on  substantially  as  at  present,  the  one 
tending  to  increase  and  the  other  to  decrease  the  volume 
of  bullion  certificates,  that  is,  the  virtual  gold  in  circu- 
lation. 

In  short  our  gold-standard  system  may  be  pictured 
as  a  lake  of  gold,  physically  in  storage  but  circulat- 
ing through  yellowbacks,  a  lake  fed  by  miners  and 
importers    and    drained    by    jewelers    and   exporters. 

This  system,  the  lake  and  its  inflow  and  outflow, 
would  continue  unchanged.  Only  the  terms  on  which 
gold  would  be  deposited  and  withdrawn  would  be 
changed. 

8.   Periodical  Variations  of  Weight  Based  on  Index 

Numbers 

We  find,  then,  in  answer  to  the  first  of  our  three 
questions  that  a  periodical  variation  of  the  dollar's 
weight  can  be  made  at  will,  and  that,  too,  without 
changing,  in  the  least,  the  nature  of  the  mechanism 
by  which  the  gold  standard  now  operates. 

We  are  now  ready  for  the  second  question :  What 
criterion  is  to  guide  the  Government  in  making  these 
changes  in  the  dollar's  weight?  Am  I  proposing  that 
some  Government  official  should  be  authorized  to  mark 
the  dollar  up  or  down  according  to  his  own  caprice? 
Most  certainly  not.  A  definite  and  simple  criterion  for 
the  required  adjustments  is  at  hand  —  the  now  famil- 
iar ''  index  number  "  of  prices.  The  Bureau  of  Labor 
Statistics,  which  publishes  our  best  present  index  num- 
ber, or  the  Bureau  of  Standards  or  other  suitable  Gov- 
ernment office,  would  be  required  to  publish  this  num- 
ber at  certain  stated  intervals,  say  bimonthly. 


96  STABILIZING    THE    DOLLAR  [Chap.  IV 

To  be  specific,  every  two  months  (or  whatever  the 
adjustment  period  chosen  might  be)  the  Bureau  would 
calculate  from  current  market  prices  how  much  our  com- 
posite basketful  of  goods  costs.  This  figure  (the  index 
number  of  prices)  it  would  publish ;  and  this  figure 
would  then  afTord  the  needed  official  sanction  to  the 
Director  of  the  Mint  to  change  the  weight  of  the  gold 
dollar — that  is,  to  change  the  amount  of  gold  which  the 
Government  would  give  or  take  for  a  gold  certificate, 
and  thus  increase  or  diminish  the  purchasing  power  cf 
that  certificate. 

The  certificate  would  always  be  equal  in  value  to 
the  gold  dollar ;  and  the  gold  dollar  would  be  kept 
equal  in  value  to  the  goods-dollar  which  is  the  ulti- 
mate standard. 

If,  for  instance,  the  index  number  representing  the 
current  price  of  our  composite  basketful  of  goods  is 
found  to  be  $1.01,  i.e.  one  per  cent  above  the  ideal 
par  {i.e.  above  the  one  dollar  price),  this  fact  would 
indicate  that  the  purchasing  power  of  the  dollar  was 
too  low,  for  it  requires  one  cent  more  than  a  dollar 
to  buy  the  ideal  basket.  This  fact  would  be  the  signal 
and  authorization  for  an  increase  of  one  per  cent  in 
the  weight  of  the  gold  dollar. 

If,  on  the  other  hand,  the  index  number  when  com- 
puted is  found  to  be  one  per  cent  below  par,  the  pur- 
chasing power  of  the  dollar  is  too  high  and  a  one  per 
cent  reduction  of  the  dollar's  weight  is  called  for. 

In  short,  then,  our  rule  or  criterion  of  adjustment  is 
simply  this :  for  every  one  per  cent  of  deviation  of 
the  index  number  above  or  below  par  found  at  any 
adjustment  date,  we  then  increase  or  decrease  the  dol- 
lar's weight  by  one  per  cent. 


Sec.  9]  A   REMEDY  97 

9.   How  the  Adjustment  Rule  Would  Work 

And  now  we  approach  the  last  of  the  three  questions 
formulated  in  §  6 :  Will  the  above  rule  for  varying  the 
dollar's  weight  really  stabilize  the  dollar?  How  can 
we  know  that  if  the  index  number  is  one  per  cent  above 
par,  a  one  per  cent  increase  in  the  weight  of  the  gold 
dollar  will  be  just  sufhcient  to  drive  the  index  number 
back  to  par  ?  The  answer  is  we  do  not  know,  any  more 
than  we  know,  when  the  steering  wheel  of  an  auto- 
mobile is  turned,  that  it  will  prove  to  have  been  turned 
just  enough  and  not  too  much.  Many  things  may  in- 
terfere in  the  period  elapsing  between  adjustments. 
But  if  the  correction  is  not  enough  or  if  it  is  too  much, 
the  index  number,  when  next  computed,  will  tell  the 
story.  Absolutely  perfect  correction  is  impossible  but 
any  imperfection  will  continue  to  reappear  and  cannot 
escape  ultimate  correction. 

Suppose,  for  instance,  that  next  month,  or  adjust- 
ment period,  the  index  number  is  found  to  remain  un- 
changed at  101%,  that  is,  that  the  basketful  of  goods 
still  costs  SI. 01.  Then  the  dollar  is  at  once  loaded  an 
additional  one  per  cent.  And  if,  next  month,  the  index 
number  is,  let  us  say,  lOOi,  ^'-e-  i  of  one  per  cent  above 
par,  that  i  of  one  per  cent  will  call  for  a  third  addition 
to  the  dollar's  weight  —  this  time  ^  of  one  per  cent. 
And  so,  as  long  as  the  index  number  persists  in  staying 
even  a  little  above  par,  the  dollar  will  continue  to  be 
loaded  at  each  adjustment  period,  until,  if  necessary, 
it  weighs  an  ounce  —  or  a  ton,  for  that  matter. 

But,  of  course,  long  before  it  can  grow  very  heavy, 
the  additional  weight  will  become  sufficient,  so  that 
the  index  number  will  be  pushed  back  to  par ;  that  is, 


98  STABILIZING   THE    DOLLAR  [Chap.  IV 

the  circulating  certificate  will  have  its  purchasing  power 
restored. 

Or,  reversely,  suppose  that  the  index  number  falls 
below  par,  say  one  per  cent  below  —  the  basket  costing 
$0.99.  This  fact  will  indicate  that  the  purchasing 
power  of  the  dollar  has  gone  up.  Accordingly,  the  gold 
dollar  will  be  reduced  in  weight  one  per  cent  and,  at 
each  adjustment  period  during  which  the  index  num- 
ber remains  below  par,  the  now  too  heavy  dollar  will 
be  unloaded  and  its  purchasing  power  brought  back 
to  par. 

Thus  by  ballast  thrown  overboard  or  taken  on,  our 
dollar  is  kept  from  ascending  or  descending  far  from 
the  proper  level  —  that  is,  from  the  equivalent  of  our 
composite  basket  of  goods. 

In  short,  the  adjustment,  like  all  human  adjustments, 
takes  place  "  by  trial  and  error."  There  is  always  a 
slight  deviation,  but  this  is  always  in  process  of  being 
corrected.  The  steering  wheel  keeps  the  monetary 
automobile  not  exactly  in  the  straight  line  marked  out, 
but  always  near  it  on  one  side  or  the  other,  so  that  its 
deviations  will  always  afford  the  criterion  needed  for 
steering  it  back. 

The  answer  to  the  third  question,  therefore,  is  that 
the  stabilization  machinery,  while  it  cannot  absolutely 
prevent  slight  aberrations  from  par,  will  persistently 
tend  to  reduce  toward  zero  every  deviation  which  comes 
along. 

It  does  not  matter  in  the  least  what  the  cause  or 
causes  of  deviation  may  be.  They  may  be  connected 
with  gold  or  bank  credit  or  anything  else.  The  devi- 
ation, no  matter  how  caused,  would  bring  a  counter- 
balancing change  in  the  gold  dollar's  weight  and  the 


Sec.  9]  A   REMEDY  99 

change  in  that  weight  will  continue  to  be  made  at 
every  adjustment  period  as  long  as  the  deviation  in  the 
index  number  continues. 

The  result  is  that  the  price  level  would  oscillate  only 
slightly.  Instead  of  great  price  convulsions,  such  as 
we  find  throughout  history,  the  index  number  would 
run  close  to  par,  say,  101,  lOOi,  101,  100,  102,  lOH,  100, 
98,  99,  99,  99i,  100,  etc.,  seldom  getting  off  the  hne 
more  than  one  or  two  per  cent. 

The  process  of  correcting  the  dollar  has  just  been 
likened  to  steering  an  automobile.  It  might  better 
be  compared  to  the  automatic  regulation  of  the  "  gov- 
ernor "  on  a  steam  engine  or  to  the  method  of  securing 
a  "  compensated  "  pendulum.  Every  aberration  brings 
its  own  correction. 

And  so  we  conform  our  gold  dollar,  approximately, 
to  the  imaginary  '^  goods-dollar."  All  other  dollars 
being  interconvertible  with  the  gold  dollar  would  keep 
equal  to  this  par.  No  change  in  our  banking  system 
would  be  required  except  that  the  gold  reserve  of  banks, 
instead  of  consisting  partly  of  gold  certificates  and 
partly  of  physical  gold,  would  consist  exclusively  of 
certificates.  The  Government  would  hold  the  physical 
gold.  Whoever  chose  to  redeem  the  gold  dollar  certifi- 
cates in  actual  gold  would  do  so  usually  to  secure  gold 
for  jewelry  and  other  arts  or  for  export.  Should  a  bank 
do  so,  the  gold  it  so  bought  would,  like  so  much  silver, 
be  liable  to  fluctuations  in  value. 

To  summarize,  each  dollar  of  bank  notes  and  other 
fiduciary  money  would,  as  now,  be  redeemable  in  a  dol- 
lar of  yellowbacks  (to  be  called  gold  bullion  dollar  cer- 
tificates) and  therefore  such  paper  money  would,  exactly 
as  now,  keep  at  parity  with  these  yellowbacks.     Each 


100  STABILIZING   THE    DOLLAR  [Chap.  IV 

dollar  of  these  yellowbacks,  or  gold  dollar  certificates, 
would,  in  turn,  be  redeemable  at  the  Government  offices 
in  a  gold  bullion  dollar  and  would,  therefore,  always  be 
of  equal  value  therewith.  And  finally,  each  dollar  of 
gold  bullion  would,  by  periodical  adjustment  of  its 
weight  through  an  index  number,  be  kept  very  nearly 
equivalent  to  the  imaginary  basket  of  goods,  the  goods- 
dollar. 

In  short,  every  actual  dollar,  a  dollar  of  bullion,  a 
dollar  of  yellowbacks,  a  dollar  of  bank  notes  or  any  other 
money,  and  a  dollar  of  bank  deposits  would  be  abso- 
lutely equivalent  to  one  another  as  well  as  approximately 
equivalent  to  the  imaginary  composite  or  goods-dollar. 

We  would  then  be  substantially  rid  of  a  fluctuating 
price  level  with  its  long  train  of  bad  consequences. 
In  other  words,  the  monetary  yardstick  would  be  stand- 
ardized. 

lo.  Proviso  against  Speculation  at  Expense  of 
the  Government 

To  avoid  speculation  in  gold  at  the  expense  of  the 
Government,  a  small  fee,  corresponding  to  what  used 
to  be  called  "  brassage,"  should  be  charged  to  de- 
positors of  gold  and  no  single  change  in  the  dollar's 
weight  should  exceed  that  fee. 

This  is  a  technical  detail  and,  with  other  technical 
points,  such  as  the  status  of  the  reserve  behind  the  gold 
bullion  dollar  certificates,  the  initial  par  of  the  index 
number,  the  selection  and  revision  of  the  items  making 
up  the  composite  dollar,  the  possible  retention  of  gold 
coins  and  coinage,  the  control  of  deposit  currency,  etc., 
need  not  here  be  entered  upon.  These  are  elaborated 
in  Appendix  I.     What  has  been  said  in  this  chapter  is 


Sec.  11]  A   REMEDY  101 

meant  to  show  that  we  have  the  power,  if  we  will  but 
use  it,  to  stabilize  the  purchasing  power  of  the  dollar. 


II.    Comparison  with  Other  Plans 

As  we  have  seen,  most  other  proposals  for  reme- 
dying the  "  high  cost  of  living  "  w^ould  operate  through 
economy  and  efficiency.  Nothing  could  be  more 
laudable  and  nothing  needs  to  be  preached  more  per- 
sistently, in  season  and  out  of  season.  An  increase 
in  production  and  the  cessation  of  industrial  warfare 
between  labor  and  capital  should,  now  and  always, 
be  striven  for.  To  whatever  extent  these  objects  are 
gained,  the  world  will  be  better  off,  whether  prices  are 
high  or  low. 

But  he  who  expects,  from  such  measures,  any  ap- 
preciable reduction  in  the  index  number  of  prices  is 
doomed  to  disappointment.  The  general  expectation 
of  such  a  reduction  is  based,  first,  on  a  false  conception 
of  the  problem,  due  to  overlooking  its  monetary  side, 
and,  secondly,  to  a  greatly  exaggerated  idea  of  the 
economy  and  efficiency  which  are  attainable.  Thus, 
the  worst  of  our  great  strikes  reduces  the  national 
production  only  about  as  much  as  declaring  a  single 
holiday,  and  most  of  the  wastes  of  industry,  though 
great,  are  inevitable  and  can  only  be  reduced  slightly 
and  gradually  through  education. 

We  may  rail  at  the  workmen  and  accuse  them  of 
slacking  and  ninety-nine  per  cent  of  them  will  plod 
along  without  even  attending  to  what  we  say.  We 
may  legislate  in  the  hope  of  forcing  economy  and 
efficiency  on  a  wastrel  world  and  shall  be  lucky  if  we 
succeed  in  doing  a  trifle  more  good  than  harm.     I  doubt 


102  STABILIZING   THE    DOLLAR  [Chap.  IV 

if  all  the  combined  effort  of  all  the  statesmen  and  moral- 
ists of  the  world  could  possibly,  in  a  whole  year,  in- 
crease production  by  two  or  three  per  cent  beyond 
what  it  would  otherwise  be. 

Another  sort  of  remedy,  and  the  most  popular  one 
at  the  present  time,  is  price  control.  During  the  war 
legal  price  control  had  its  maximum  effect  which,  while 
great  on  a  few  commodities,  probably  did  not,  as  sta- 
tistics can  be  adduced  to  show,  affect  the  general  price 
level  as  much  as  five  per  cent.  That  now  in  times 
of  peace  the  effect  could  be  half  that  much  is  almost 
unthinkable. 

The  job  is  too  big  for  any  man  or  any  government. 
If  our  Government  tries  to  fix  retail  prices  to  protect 
the  customer  it  must  then  go  further  and  fix  wholesale 
prices  to  protect  the  retailer  and  then,  likewise,  fix  the 
prices  of  jobber,  manufacturer,  and  producer  of  raw 
materials.  Thousands  and  millions  of  dealers  will 
have  to  be  watched,  controlled,  penalized,  by  a  mighty 
host  of  government  officials,  sure  to  be  circumvented 
as  soon  as  their  backs  are  turned. 

I  do  not  hesitate  to  predict  that  the  present  attempt 
to  fix  individual  prices  will  end  like  all  previous  at- 
tempts, even  those  of  autocratic  Germany,  in  disap- 
pointment. 

Is  it  not  a  little  ludicrous  to  use  so  much  force  with- 
out much  effect  when  the  desired  effect  without  any 
force  at  all  could  be  secured  through  stabilizing  the 
dollar?  If  we  had  tried  to  secure  "  dayhght  saving  " 
by  force,  compelling  each  factory,  store,  school,  church, 
to  begin  an  hour  earlier  and  each  individual  to  eat  his 
breakfast  an  hour  earlier  than  before,  the  Attorney 
General  would  certainly  have  had  his  hands  full ! 


Sec.  11]  A   REMEDY  103 

Instead  of  thus  employing  an  army  of  policemen, 
exerting  repressive  force  at  thousands  and  millions 
of  separate  points,  we  simply  regulated  our  instrument 
of  measuring  time,  the  clock,  and  lo,  automatically 
the  factory,  store,  school,  and  church  began  an  hour 
earlier  and  individuals  ate  their  breakfast  an  hour 
earlier  of  their  own  free  will. 

So  with  the  price  level,  while  the  strong-arm  method 
is  not  only  costly  and  vexatious  but  futile,  the  simple 
regulation  of  our  instrument  for  measuring  prices, 
the  dollar,  will  accomplish  the  same  result  not  only 
without  cost  and  effort  but,  what  is  more  to  the  point, 
with  success. 

It  is  very  hard  to  control  any  individual  price  in  the 
face  of  the  economic  forces  of  supply  and  demand,  but 
it  is  very  easy  to  control  the  general  scale  of  prices  ;  for 
the  general  scale  of  prices  depends,  among  other  things, 
on  the  weight  of  the  gold  dollar  and  the  weight  of  the 
gold  dollar  is  whatever  we  choose  to  make  it. 

However  great  may  be  the  disturbing  effect  of  some 
other  cause  on  the  scale  of  prices,  that  effect  can  always 
be  neutralized  by  a  suitable  change  in  the  weight  of  the 
gold  dollar,  provided,  of  course,  that  all  other  dollars 
are  kept  redeemable  in  gold  dollars. 

The  gold  dollar,  being  the  basic  unit,  is  the  key  to 
the  situation. 


CHAPTER  V 

CONCLUSION 

I.   Summary  of  the  Plan 

The  plan,  as  set  forth  in  the  last  chapter,  is  in  brief : 

(1)  To  abolish  gold  coins  and  to  convert  our  present 
gold  certificates  into  "  gold  bullion  dollar  certificates  " 
entitling  the  holder,  on  any  date,  to  dollars  of  gold  bul- 
lion of  such  weight  as  may  be  officially  declared  to  con- 
stitute a  dollar  for  that  date. 

(2)  To  retain  the  "  free  coinage,"  i.e.  to  be  more 
exact,  the  unrestricted  deposit,  of  gold,  and  to  retain 
also  the  unrestricted  redemption  of  gold  bullion  dollar 
certificates. 

(3)  To  designate  an  ideal  composite  or  ''goods-dol- 
lar," consisting  of  a  representative  assortment  of  com- 
modities, worth,  at  the  outset,  a  gold  dollar  of  the 
present  weight,  and  to  establish  an  "  index  number  " 
for  recording,  at  stated  times,  the  market  price  of  this 
ideal  goods-dollar  in  terms  of  the  gold  bulUon  dollar. 

(4)  To  adjust  the  weight  of  the  dollar  (i.e.  the  gold 
bullion  dollar)  at  stated  intervals,  each  adjustment  to 
be  proportioned  to  the  recorded  deviation  of  the  index 
number  from  par. 

(5)  To  impose  a  small  "  brassage "  fee  for  the  de- 
posit of  gold  bullion  and  provide  that  no  one  change  in 
the  bullion  dolor's  weight  shall  exceed  that  fee. 

104 


Sec.  2]  CONCLUSION  105 

In  addition  to  these  features  of  the  plan  itself  should 
be  mentioned  the  tacit  assumption  that  we  retain 
a  sound  banking  system.  Without  such,  the  effective- 
ness of   the  stabilization  plan  would   be  quite   lost.^ 

2.   The  Crux  of  the  Plan 

The  crux  of  the  plan  lies  in  (4)  —  the  provision  for 
adjusting  the  weight  of  the  gold  bullion  dollar.  This 
is  the  adjustment  rule  by  which  the  index  number  regu- 
lates the  dollar's  weight.     Its  significance  is  that : 

To  keep  the  dollar  from  shrinking  in  value  we  make 
it  grow  in  weight,  thus  recognizing  that  a  depreciated 
dollar  is  a  short-weight  dollar ;  and,  reversely,  to  keep 
the  dollar  from  growing  in  value  we  make  it  shrink  in 
weight,  thus  recognizing  that  an  appreciated  dollar  is 
an  overweight  dollar. 

Or,  in  alternative  terms,  since  a  heavier  or  lighter 
dollar  simply  means  a  lowered  or  raised  price  of  gold, 
we  may  say  that : 

To  keep  the  price  level  of  other  things  from  rising  or 
falling  we  make  the  price  of  gold  fall  or  rise.^ 

1  For  details,  see  Appendix  I ,  §  7. 

2  These  two  statements  and  paragraph  (4)  of  the  above  summary 
are  really  three  different  formulations  of  the  same  adjustment  rule. 
There  is  a  fourth  :  we  prevent  a  loss  or  gain  in  the  purchasing  power 
of  the  dollar  by  lowering  or  raising  the  price  of  gold.  All  four  modes 
of  statement  may  be  united  as  follows : 

a  rise  or  fall  of  the  price  level 


^  a  fall  or  rise  of  the  purchasing  power  of  the  dollar 


by 


increasing  or  decreasing  the  weight  of  the  dollar 

decreasing  or  increasing  the  price  of  gold. 
For  most  people  I  think  the  original  formulation  (the  4th  paragraph 
of  the  summary  above)  is  the  most  convenient,  namely,  the  one  in 
terms  of  the  price  level  and  dollar's  weight  rather  than  in  terms  of 
the  purchasing  power  of  the  dollar  or  the  price  of  gold,  or  both. 


106  STABILIZING   THE   DOLLAR  [Chap.  V 

3.   Artificiality  of  a  Fixed-Weight  Dollar 

At  present,  with  a  dollar  always  containing  23.22 
grains  of  gold,  the  price  of  gold  is  always  $20.67  an 
ounce.  However  far  gold  may  really  depreciate,  our 
artificially  defined  dollar  creates  an  artificially  fixed 
price  for  gold.  It  does  not  allow  gold  depreciation  to 
show  itself  in  a  lowered  price  of  gold.  Consequently 
it  shows  itself  abnormally,  —  in  the  raised  prices  of 
other  things. 

It  is  both  wrong  and  absurd  thus  to  force  these 
other  things  to  register  the  fluctuations  in  the  value 
of  gold.  When  gold  depreciates,  its  price  should 
be  reduced.  Furthermore,  when  we  see  the  price  of 
anything  else,  say  corn,  rising,  we  ought  to  be  able,  as 
we  are  not  now,  to  be  reasonably  sure  that  all  of  this 
rise  represents  a  rise  in  that  corn  and  not  some  of  it  a 
fall  in  gold.  Reversely,  when  gold  appreciates,  its 
price  should  be  raised  ;  and  when  the  price  of  anything 
else  falls  it  should  represent  wholly  a  fall  in  that  partic- 
ular commodity,  not  partly  a  rise  in  gold. 

At  present  the  Government  is  not  authorized  by  law 
to  mark  gold  down  when  it  goes  down,  nor  up  when  it 
goes  up.  The  grocer  can  mark  his  goods  up  or  down. 
He  can  increase  or  decrease  the  number  of  pounds  of 
sugar  he  will  give  for  a  dollar.  But  the  Government 
is  helpless. 

When  a  flood  of  gold  pours  in  from  Cripple  Creek  or 
the  Rand,  or  from  war-ridden  Europe,  the  Government 
is  not  permitted  to  increase  the  weight  of  a  dollar's 
worth  of  gold  above  23.22  grains  or  to  decrease  the  price 
of  gold  below  $20.67  an  ounce.  Instead,  therefore,  there 
is  a  redundant  currency  and  a  "  high  cost  of  living." 


Sec.  4]  CONCLUSION  107 

When,  on  the  other  hand,  our  exporters  demand  gold 
our  Government  is  equally  helpless  to  charge  more  for 
it  —  that  is,  to  reduce  the  weight  of  a  dollar's  worth  of 
gold  below  23.22  grains.  The  law  compels  it  to  go  on 
selling  its  diminishing  store  at  the  same  old  price  of 
S20.67  an  ounce ;  and  so  a  violent  contraction  of  the 
currency  may  follow. 

In  either  case  we  leave  our  precious  standard  at  the 
mercy  of  foreign  conditions,  of  metallurgical  inventions, 
the  luck  of  gold  prospectors,  the  fashions  in  jewelry, 
the  changes  in  banking  systems,  and  the  policy  of  Gov- 
ernment financiers. 

The  proposal  here  made  is  to  authorize  a  raising 
or  lowering  of  the  sluice  gates  by  which  gold  flows 
in  or  out,  so  as  to  keep  our  money  lake  at  a  uniform 
level.  By  increasing  or  decreasing  the  dollar's  weight, 
we  would  thus  be  providing  against  either  a  flood  or 
a  drain. 

4.   Transition  Would  Cause  No  Shock 

The  plan  should,  of  course,  start  off  with  a  price  level 
close  to  that  actually  existing  immediately  before  its 
adoption. 1  There  should,  I  believe,  be  no  attempt  to 
put  prices  back  where  they  were  many  years  ago. 
There  would,  therefore,  be  no  shock.  Business  would 
simply  be  set  free  from  future  shocks. 

There  would  be  less  shock  than  when  we  adopted 
standard  time  and  changed  our  watches  accordingly. 
Just  as  the  time  engagements  of  the  whole  world  have 
been  modified  and  improved  by  the  shift  of  watches 
from  local  to  standard  time,  and  more  recently  by  the 

1  This  point  is  amplified  in  Appendix  I,  §  4. 


108  STABILIZING    THE    DOLLAR  [Chap.  V 

"  daylight-saving  "  shifts,  so  the  money  engagements 
of  commerce  would  all  be  put  on  a  true  standard  with- 
out jar  or  confusion. 

Substantially  the  same  kinds  of  money  would  be 
passed  from  hand  to  hand  as  before  the  system  was 
adopted  ;  and  the  ordinary  man  would  be  quite  unaware 
of  any  change  in  system,  —  as  unconscious,  in  fact,  of 
the  operation  of  the  new  system  as  he  is  now  uncon- 
scious of  the  operation  of  the  present  system,  or  as 
were  the  inhabitants  of  India  when  the  "  gold  ex- 
change "  standard  went  into  force  a  quarter  of  a  cen- 
tury ago. 

The  only  classes  of  people  who  would  notice  the 
change  would  be  those  who  sell  and  buy  gold  bullion. 
The  gold  miners  and  importers  of  gold  bringing  gold 
to  the  Government  for  deposit,  on  the  one  hand,  and 
the  goldsmiths  and  exporters  of  gold,  on  the  other  hand, 
taking  gold  away,  would  find  that  the  price  they  could 
get  or  would  have  to  give  respectively  would  not  always 
be  $20.67  per  ounce. 


5.    Contract-Keeping  Would  Cease  to  Be  Virtual 

Pocket-Picking 

The  plan  would  put  a  stop,  once  for  all,  to  a  terrible 
evil  which  for  centuries  has  vexed  the  world,  the  evil 
of  upsetting  monetary  contracts  and  understandings. 
All  contracts,  at  present,  though  nominally  carried  out, 
are  really  tampered  with  as  truly  as  though  false  weights 
and  measures  were  used  for  delivering  coal  or  grain. 

As  noted  in  a  previous  chapter,  our  National  Consti- 
tution forbids  the  state  to  impair  the  obligation  of 
contracts  and  the  Government  itself  is  supposed  to 


Sec.  5]  CONCLUSION  109 

conform  to  the  principle  of  this  prohibition. ^  But  with 
our  variable  yardstick  of  commerce,  observance  of  the 
constitutional  provision,  at  best,  conforms  only  to  the 
letter,  not  the  spirit,  because  the  letter  of  the  contract, 
through  the  law,  fixes  the  obligation  in  gold  by  weight, 
whereas  the  contracting  parties  are  not  properly  con- 
cerned with  what  a  gold  dollar  weighs  ;  usually,  in  fact, 
they  do  not  even  know  that  a  dollar  is  a  weight-unit. 
The  meeting  of  their  minds  is  essentially  on  the  basis 
of  what  a  dollar  is  worth  —  that  is,  of  what  it  will  do  for 
them  in  commerce ;  and  they  can  make  little  or  no 
allowance  for  any  change  in  that  worth. 

Thus,  under  the  very  protection  of  the  constitutional 
provision  mentioned,  one  of  the  parties  to  the  contract 
always  does  rob  the  other  to  some  extent.  This  social 
pocket-picking,  unconscious  but  real,  would  cease,  if 
our  monetary  yardstick  were  regulated ;  and  with  it 
would  cease  also  discontent,  jealousy,  and  suspicion,  in 
so  far  as  these  grow  out  of  that  species  of  social  injustice. 
Crises  and  depressions  of  trade  would  be  reduced  in  in- 
tensity, if  not  rendered  impossible,  and  the  fundamental 
reason  for  much  unsound  speculation  would  be  taken 
away. 

Business,  now  periodically  disturbed  by  the  pranks 
of  our  mischievous  dollar,  would  be  put  on  a  founda- 
tion more  secure  than  ever  before  because  the  greatest 
and  most  universal  uncertainty  or  gamble,  all  the  more 
disastrous  because  unseen  —  the  gamble  in  gold  — 
would  be  removed. 

1  With  certain  exceptions,  such  as  bankruptcy  laws  for  extraor- 
dinary cases.     In  this  connection,  see  Appendix  I,  §  6. 


110  STABILIZING   THE    DOLLAR  [Chap.  V 

6.   Not  a  Cure-Ail 

It  is  not  pretended  that  to  stabilize  the  purchasing 
power  of  the  dollar  would  banish  all  complaint  in  the 
financial,  business,  and  industrial  world,  much  less  serve 
as  a  substitute  for  progressive  economies.  A  stable 
monetary  unit  would  be  no  more  a  substitute  for  the 
fertility  of  the  soil  than  a  stable  bushel  basket.  Yet 
a  reliable  bushel  will  indirectly  help  even  the  tilling  of 
the  soil ;  and  a  reliable  dollar  would  remove  a  heavy 
handicap  now  put  on  our  productive  energy  and  so  in- 
directly help  all  production.  Dependable  weights, 
measures,  and  standards  eliminate  those  enormous 
wastes  which  come  from  uncertainty,  and,  of  all  the 
possible  wastes  from  uncertain  units  used  in  commerce, 
those  from  an  uncertain  dollar  are  by  far  the  greatest 
and  the  gravest. 

Nor  do  I  mean  to  imply  that  a  stable  dollar  will  insure 
a  just  distribution  of  wealth.  It  will,  however,  help 
toward  that  end  not  only  by  preventing  a  species  of 
subtle  pocket-picking  (described  in  Chapter  III),  but 
also  by  clarifying  the  whole  distribution  situation.  It 
will  make  sun-clear  that  the  goods  that  come  out  of  the 
annual  wealth  production  of  the  nation  are  really 
growing  or  shrinking,  and  not  merely  being  tossed  about 
on  the  stream  of  money.  It  will  give  each  man  a  sound 
basis  for  an  opinion  whether,  when  his  fortunes  change, 
they  change  relatively  with  the  fortunes  of  others.  It 
will  go  far  to  rid  us  of  the  conflict  of  opinion  and  asser- 
tion which  now  holds  us  back  from  effective  action  and 
uses  up  our  energies  in  discussions  and  investigations  of 
the  most  elementary  facts.  Current  economic  discus- 
sion is  underlaid  by  conflicting  assertions,  —  that  the 


Sec.  6]  CONCLUSION  HI 

laborer's  real  wages  (i.e.  the  goods  he  can  buy  with  his 
money  wages)  are  increasing  ;  that  they  are  decreasing  ; 
that  the  hardships  of  wage  earners  are  due  to  their  own 
wasteful  expenditures ;  that  they  are  due  to  the  greed 
of  employing  capitalists  who  seize  an  increasing  share 
of  the  product ;  that  they  are  due  to  neither  of  these 
things  but  to  the  absorption  of  an  ever  increasing  share 
of  the  annual  production  by  the  do-nothing  landlord 
or  the  private  owner  of  natural  resources,  who  expends 
neither  labor  nor  capital  on  the  development  of  these 
resources  but  merely  leases  them  to  men  who  do,  and 
exacts  tribute  from  the  laborer  and  capitalist  for  the 
privilege ;  that  the  demands  of  certain  classes  of  rail- 
way laborers  for  increased  money  wages  are  exorbitant 
and  ought  not  to  be  granted;  that  the  demands  are 
necessary  to  balance  the  increased  cost  of  living  and 
ought  to  be  granted ;  that  the  demands  of  the  rail- 
ways for  increased  freight  rates  or  of  the  trolley  cars  for 
increased  fares  are  necessary  to  make  good  increased 
costs  due  to  increasing  prices  and  wages;  that  these 
demands  are  not  necessary  for  that  purpose  —  and  so 
on  and  on  without  end. 

Before  action  upon  these  alleged  evils  can  be  based 
on  sure  ground,  it  is  essential  to  find  out  the  facts ;  but 
the  fluctuating  dollar  hopelessly  conceals  the  facts.  It 
blinds  the  eyes  of  the  mass  of  men  whose  right  it  is  to 
know  the  facts  and  whose  duty  it  ultimately  is,  under 
our  democratic  form  of  government,  to  choose  one  or 
more  remedies  for  such  evils  as  exist.  The  fluctuating 
dollar  keeps  us  all  in  ignorance;  whereas  a  stabilized 
dollar  would  lay  bare  the  facts. 

It  is  no  exaggeration  to  say  that  stabilizing  the  dollar 
would  directly  and  indirectly  accomplish  more  social 


112  STABILIZING   THE   DOLLAR  [Chap.  V 

justice  and  go  farther  in  the  solution  of  our  industrial, 
commercial,  and  financial  problems  than  almost  any 
other  reform  proposed  in  the  world  to-day ;  and  this 
it  would  do  without  the  exertion  of  any  repressive  police 
force,  but  as  simply  and  silently  as  setting  our  watches. 
Uncertainty  is  a  mark  of  an  undeveloped  civilization, 
and  its  demolition  (through  applied  science,  insurance, 
safeguards,  and  standardization)  is  one  of  the  chief 
characteristics  of  a  highly  developed  civilization.  Our 
uncertain  dollar  is  simply  a  relic  of  the  Stone  Age.  It 
is  an  anomaly  to-day. 

7.   No  Cleiim  to  Theoretical  Perfection 

Perfection,  of  course,  is  not  claimed  for  the  proposed 
goods-dollar.  It  is  not  an  "  absolute  "  standard  of 
value.  An  absolute  standard  of  value  is  as  unattain- 
able as  an  absolute  measure  of  length.  A  change  in 
relative  value  may,  theoretically,  indicate  a  change  in 
the  "  absolute  "  value  either  of  goods  or  of  money ;  but 
it  is  not  possible  for  us  to  know,  except  in  a  general  way, 
how  much  of  the  absolute  change  is  in  the  goods  and  how 
much  is  in  the  dollar.  We  are  in  much  the  same  situa- 
tion as  the  astronomers.  Our  economical "  fixed  stars  " 
are  fixed  only  in  a  relative  sense.  We  cannot  measure 
the  distances  between  them  in  terms  of  absolute  value, 
but  only  in  terms  of  visible  goods,  the  general  average 
of  which,  like  the  general  average  of  the  stars,  is  the 
nearest  approach  to  absolute  invariability  we  can,  in 
practice,  reach  and  measure. 

The  present  proposal,  therefore,  is  simply  to  do  for 
the  most  important  unit  in  all  comjnerce  —  the  dollar 
—  what  we  have  already  done  for  every  other  unit. 


Sec.  8]  CONCLUSION  113 

8.  Why  Has  So  Simple  a  Remedy  Been  Overlooked 

The  cautious  and  conservative  reader  will  ask :  if  the 
evils  of  our  present  dollar  are  so  great  and  the  remedy 
so  simple,  why  did  not  our  civilization  improve  its  mon- 
etary units  years  ago,  as  it  improved  all  other  units? 
Why  was  so  simple  an  idea  overlooked  or  ignored? 

There  are  several  answers,  some  discussed  in  Appen- 
dix II :  ignorance,  the  money  illusion,  and  the  absence, 
until  recently,  of  any  large  mass  of  time  contracts  re- 
quiring any  reliable  standard  of  deferred  payments. 

But  the  most  specific  and  conclusive  answer  is  this : 
mankind  could  not  have  standardized  money  until  re- 
cently, because  until  recently  it  lacked  the  necessary 
instrument,  the  index  number.  Just  as  mankind  could 
not  standardize  units  of  weight  until  a  suitable  instru- 
ment, the  scales,  was  devised  for  measuring  weight; 
and  just  as  electrical  units,  like  the  ohm  and  the  kilo- 
watt, could  not  be  standardized  until  the  proper  in- 
struments for  measuring  such  magnitudes  were  in- 
vented ;  so  money  could  not  be  standardized  until  the 
invention  and  the  perfecting  of  the  index  number. 

The  index  number,  the  only  instrument  we  possess 
for  measuring  purchasing  power,  is  a  very  recent  inven- 
tion. Professor  Jevons  a  generation  ago  may,  I  think, 
be  truly  said  to  have  been  the  inventor  (although  the 
general  idea  had  been  anticipated  by  others).  But 
until  the  last  ten  or  twenty  years,  this  new  instrument 
had  not  been  sufficiently  perfected  and  tested  to  create 
general  confidence  in  its  results.  Only  within  that 
brief  period  has  it  come  into  general  use  among  busi- 
ness journals  and  won  the  confidence  of  business  men. 
We  see,  then,  that  the  practical  application  of  this  great 


114  STABILIZING   THE    DOLLAR  [Chap.  V 

instrument  to  the  improvement  of  our  crude  dollar  is 
belated,  not  centuries,  but,  at  most,  only  a  couple  of 
decades. 

9.  What  Is  to  Hinder 

The  plan  really  has  had  less  important  arguments 
against  its  adoption  than  any  other  practical  proposal 
in  the  realm  of  money  and  banking  of  which  I  know. 
In  most  other  proposals  there  are  many  valid  pros  and 
cons.  This  proposal  is  simply  to  make  our  monetary 
unit  less  variable.  It  is  as  unobjectionable  as  is  a 
sealer  of  weights  and  measures. 

The  greatest  obstacle,  as  is  emphasized  more  fully 
in  Appendix  II,  §  3,  is  the  same  as  that  which  has  held 
back  every  other  reform  in  the  world's  history  :  namely, 
sheer  conservatism,  the  "  stand  pat  "  frame  of  mind,  the 
temperamental  prejudice  against  innovation.  This 
filibusterer  may  appear  in  many  striking  costumes  and 
embellishments  ;  but  always  it  will  be  the  same  psycho- 
logical personality.  Usually,  the  opponents  of  per- 
fectly obvious  reforms  are  unconscious  of  this,  the  real 
source  of  their  ingenious  objections.  And,  once  the 
composite  standard  has  become  an  accomplished  fact, 
the  standpatters  will  be  its  staunchest  defenders ;  for 
they  are  simply  the  friends  of  what  is  and  the  enemies 
of  what  is  not. 

We  can  put  such  people  to  the  test  (or  they  can  put 
themselves  to  the  test  if  they  will)  by  a  simple  direct 
question  :  Instead  of  being  asked  to  choose  between  the 
present  gold  standard  and  the  composite  standard,  the 
former  of  which  is  in  use  and  the  latter  not,  let  them 
be  asked  to  choose  between  a  copper  standard  and  a 
composite  standard,  neither  of  which  is  in  use.     If  a 


Sec.  9]  CONCLUSION  115 

contract  in  goods-dollars  is  safer  than  a  venture  in 
copper  dollars,  why  is  it  not  safer  than  a  venture  in  gold 
dollars  ? 

Perhaps  an  equally  important  obstacle  is  ignorance, 
or  rather  the  lack  of  the  requisite  imagination  to 
visualize  the  outrages  now  perpetrated  by  our  dollar's 
perpetual  changes  and  to  connect  the  effect  with  the 
cause.  If  there  were  such  a  vivid  realization  of  what 
is  going  on,  both  the  conservatives  who  now  deprecate 
any  change  of  system  and  the  radicals  who  now  advo- 
cate irrelevant  changes  to  remedy  some  of  the  evils 
would  unite  in  an  inomediate  demand  for  a  stable 
dollar. 

To  see  that  this  is  true  we  only  need  to  think  what 
would  happen  if  the  social  injustice  we  have  discussed, 
now  so  obscure,  could  only  be  made  to  stand  out  in 
clear  relief.  Imagine  a  society  with  a  stable  dollar 
but  yet  with  the  very  same  injustice  we  now  experience 
except  that  it  is  deliberately  administered. 

To  make  this  supposition  definite  suppose  the  United 
States  had  had  a  stable  dollar  during  the  last  few  dec- 
ades but  had,  with  some  strange  malice,  used  the 
index  number  of  prices  in  Canada  or  Europe  (which,  it 
is  assumed,  held  to  the  old  unstable  system)  to  produce 
extraneously  the  identical  evils  we  have  actually  ex- 
perienced. By  the  caprice  of  the  index  number  the 
debt  of  $1000  contracted  in  1880  would  have  had  to  be 
paid  hterally  by  $1200  in  1896  and  the  debt  of  $1000 
contracted  in  1896  would  have  to  be  paid  literally  by 
only  $400  in  1919.  The  producer  would  have  been 
deprived  by  the  operation  of  the  supposed  law  of  his 
profits  before  1896  and  the  bondholder  would  have  been 
deprived  of  all  of  his  interest  and  part  of  his  principal 


116  STABILIZING   THE   DOLLAR  [Chap.  V 

after  that  date.  The  salaried  man  and  wage  earner 
would  have  had  their  salaries  and  wages  definitely 
docked  by  the  law  so  that  the  wage  earner  of  1919  would 
get  only  three  fourths  of  what  he  got  in  1913. 

Such  a  whimsical  use  of  an  index  number  to  de- 
fraud would  of  course  not  be  tolerated  for  an  instant. 
The  conservative  would  be  furious,  the  radical  still 
more  so;  only  the  latter  would  not  be  devoting  his 
efforts  to  sabotage,  price  fixing,  restricting  cold 
storage,  etc.  Every  one  would  unite  to  stop  such  use 
of  an  index  number  to  destabilize  a  stable  standard. 

Yet  precisely  the  same  reasons  in  precisely  the  same 
degree  now  justify  the  use  of  an  index  number  to 
stabilize  an  unstable  standard  ! 

10.   Precedents 

Even  before  index  numbers  were  dreamed  of,  some 
contracting  parties  have,  at  times  when  the  instability 
of  monetary  units  became  especially  intolerable, 
sought  some  partial  escape.  A  number  of  instances 
of  this  sort  are  given  in  Appendix  V.  These  include 
contracts  in  terms  of  foreign  coin,  or  in  terms  of  grain, 
or  iron,  or  in  terms  of  composites  of  goods.  The  last 
named  includes  the  recent  adoption  by  many  firms  and 
official  bodies  of  a  supplement  or  correction  to  ordi- 
nary money  wages  by  means  of  an  index  number  of  the 
cost  of  living. 

II.   What  Might  Have  Been 

Let  us  stop  to  think  what  would  have  happened  if, 
when  resuming  specie  payments  in  1879  (to  go  no 
further  back),  we  and  other  countries  had  applied 
these  principles  and  really  standardized  monetary  units. 


Sec.  11]  CONCLUSION  117 

We  should  have  escaped  the  billions  of  dollars' 
worth  of  injury  from  falling  prices  between  1879  and 
1896,  to  farmers,  independent  producers,  debtors, 
stockholders,  and  enterprisers  generally.  There  were 
bankruptcies,  foreclosures  and  reorganizations,  and  a 
resultant  shift  of  control  from  the  natural  captains 
of  industry,  —  often  bankrupted,  as  we  have  seen, 
through  no  fault  of  theirs,  —  to  the  holders  of  mortgage 
bonds  and  the  other  silent  partners  not  fitted  by  tem- 
perament or  training  to  conduct  industrial  enterprises. 

We  should  also  have  escaped  the  consequent  convul- 
sions of  business :  the  crises  of  1884  and  1893 ;  the 
throwing  out  of  work  of  armies  of  men ;  the  recruiting 
of  "  Coxey's  army  "  ;  the  bitter  feeling  of  the  debtor- 
West  toward  the  creditor-East ;  the  growth  of  "  popu- 
lism" ;  the  hatred  of  the  "  bloated  bondholders  "  and 
the  "  gold  bugs  of  Wall  Street  "  ;  the  futile,  costly, 
business-depressing,  free-silver  agitation;  and  the 
peril  of  the  pohtical  campaign  of  1896  which,  for  a  time, 
threatened  us  with  a  remedy  worse  than  the  disease. 

In  like  manner,  we  should  have  escaped  the  opposite 
evils  —  those  that  have  occurred  since  1896 :  the 
rising  cost  of  living ;  the  loss  (concealed  but  real)  of  the 
interest  on  the  savings  of  the  poor  and  of  the  real  in- 
come of  bondholders.  We  should  have  escaped  the 
failure  of  the  wage  earner  to  secure  a  share  of  our  in- 
creasing wealth ;  for  instance,  the  net  loss  of  33%  of 
real  wages  (as  measured  in  food)  between  1907  and 
1917,  the  year  we  entered  the  war.  We  should  have 
escaped  the  food  riots  all  over  the  world.  We  should 
have  escaped  much  of  the  speculation  which  has  been 
so  widespread ;  much  of  the  muckraking  agitation ; 
much  of  the  "  I.  W.  W."  affliction ;   much  of  the  class 


118  STABILIZING   THE    DOLLAR  [Chap.  V 

hatred  directed  against  business  men  because  of  the 
lucky  ''  profiteers."  We  should  have  escaped  the 
crisis  of  1907.  We  should  have  escaped  many  of  the 
strikes  for  higher  wages  paralyzing  our  preparations  for 
war.  We  should  have  escaped  much  of  the  embarrass- 
ment of  the  railroads,  street  railways,  and  other 
public-service  industries  which,  with  rates  fixed  by  law, 
could  not  pay  just  wages  to  labor  and,  at  the  same  time, 
make  money  or  invest  new  capital  and  give  the  public 
the  service  it  needed.  Finally,  while  gold  would  still 
have  come  to  us  during  the  war,  we  should  have 
escaped  the  inflation  of  prices  which,  under  our  present 
system,  we  have  suffered. 

It  is  cold  comfort  for  the  losers  in  this  gold  lottery  to 
be  told  that  others  have  won  what  they  have  lost. 
And  it  isn't  even  true ;  for,  as  we  have  seen,  the  con- 
fusion and  uncertainty,  the  dislocating  and  shifting  of 
the  wheels  of  industry,  have  caused  a  general  and 
absolute  loss  of  wealth,  in  which  loss  the  very  winners 
in  this  gold  lottery  have,  most  of  them,  shared.  Only 
a  few  have  emerged  with  net  profits  and  swollen 
fortunes,  as  the  lucky  winners  of  the  biggest  prizes ; 
and  no  pubhc-spirited  man  can  rejoice  in  such  un- 
earned gains. 

12.   What  Is  in  Store 

We  do  not  yet  know  "  which  way  the  cat  will  jump." 
If  European  nations  make  prompt  preparations  for 
resuming  specie  payments,  there  will  be  the  same 
disastrous  contraction  in  Europe  that  we  experienced 
after  the  Civil  War  ;  and  we  shall  feel  the  reflex  effects 
of  that  contraction  by  having  our  hoard  of  gold  drained 
back  to  Europe. 


Sec.  12]  CONCLUSION  119 

On  the  other  hand,  the  nations  may  not  only  avoid 
contracting  their  currencies  but  may  still  further  inflate 
them.  The  huge  task  of  reconstructing  Europe  may 
lead  to  new  issues  of  paper  money;  and  it  is  reason- 
ably sure  that  there  will  be  new  expansions  of  com- 
mercial loans.  It  is  almost  certain  that  general 
deposit  banking,  now  confined  almost  wholly  to 
Anglo-Saxon  countries,  will  spread  over  the  continent 
of  Europe,  adding  billions  of  virtual  currency  to  the 
circulating  medium.  As  A.  C.  Miller  of  the  Federal 
Reserve  Board  says :  '^  If  the  League  of  Nations,  the 
reduction  of  armaments  and  the  like  become  realities, 
then  the  accumulation  of  hoards  of  gold  under  the  im- 
pulse of  national  fears  or  ambitions  must  be  suffered  to 
go  the  way  of  other  outworn  practices"  ;  and  this  fact 
will  tend  toward  inflation. 

There  are  many  unknown  elements  —  including  the 
rearrangement  of  European  currencies  and  the  policy 
as  to  Government  debts  (whether  it  shall  be  immediate 
payment  out  of  capital,  slow  payment  out  of  income, 
repudiation,  or  deeper  debt) .  No  one  yet  knows  which 
group  of  influences  will  prevail,  —  the  group  tending 
toward  inflation  or  the  group  tending  toward  contrac- 
tion. Perhaps  first  one  group  and  then  the  other  will 
prevail  in  convulsive  alternation,  as  in  a  mighty  battle, 
just  as,  after  the  outburst  of  war,  our  gold  first  left  us 
and  then  returned,  convulsing  foreign  exchanges. 
Probably  few  periods  in  history  —  if  any  —  have  pre- 
sented so  puzzling  an  outlook.  We  may  make  our 
forecasts  or  guesses  but  no  man  lives  whose  eyes  can 
see  clearly  through  the  mist.^ 

1  For  my  own  guess  see  The  Neiu  Price  Revolution,  United  States  De- 
partment of  Labor,  Information  and  Education  Service,  March,  1919. 


120  STABILIZING   THE    DOLLAR  [Chap.  V 

Of  one  thing  we  may  be  all  but  sure  !  The  price  level 
will  not  stand  still  unless  we  hitch  it.  It  never  has ; 
and  now,  of  all  times,  with  the  vast  conflicting  forces 
ahead,  we  shall  be  foolish  if  we  expect  complete  equilib- 
rium. On  the  contrary,  we  are  probably  destined  to 
see,  in  the  next  generation,  important  price  movements, 
perhaps  more  erratic  than  those  in  the  past. 

The  whole  question  of  monetary  standards  will  in- 
evitably come  up  for  discussion.  History  will  repeat 
itself  in  some  degree  and  Europe  will  almost  certainly 
see  a  "  greenback"  party  arise  as  we  did  after  the  Civil 
War,  opposed  to  any  return  to  the  old  price  level  es- 
pecially as  that  return  will  double  or  quadruple  the 
cost  of  paying  off  the  war  loans.  The  bimetallist  and 
free-silver  exponent  also  are  once  more  asking  a  hear- 
ing. The  gold  producers,  hard  hit  by  the  fact  that 
their  product  has  been  made  a  drug  on  the  markets 
(by  the  vast  amounts  of  paper  and  credit  substitute 
for  gold),  were  recently  asking  for  relief  by  measures 
which  would  only  aggravate  the  situation. 

I  venture  to  predict  that  our  present  problem  — 
of  a  price  level  dislocated  by  the  war  —  will  con- 
tinue insistently  to  press  for  solution  until  it  is  settled. 
It  will  not  settle  itself.  If  prices  rise  much  further 
—  which  is  by  no  means  impossible  —  discontent  may 
turn  to  fury  or  revolution. 

If  prices  fall  far  toward  pre-war  levels  we  shall  be  on 
the  road  to  depression  of  trade,  unemployment,  and  all 
those  ills  and  grievances  of  twenty-five  years  ago. 

If,  by  accident  and  contrary  to  all  recorded  experi- 
ence, the  price  level  should  remain  fairly  constant,  its 
right  to  continue  so  high  will  be  long  contested. 

On  the  other  hand,  if  once  we  deliberately  choose  a 


Sec.  13]  CONCLUSION  121 

price  level  after  reference  to  an  expert  and  impartial 
commission  and  then  keep  that  level  unchanged  we 
shall  give  it  a  right  to  exist.  The  verdict  will  soon 
be  generally  accepted.  Any  unadjusted  factors  will 
gradually  make  the  needed  changes.  Business  will  be 
rid  of  the  handicap  of  uncertainty  as  to  what  the 
dollar  is.  In  particular,  wages  will  rise  to  recover  the 
purchasing  power  lost  in  the  losing  race  with  the  high 
cost  of  living.  The  sense  of  social  grievance,  so  far  as 
this  is  due  to  monetary  instability,  will,  year  by  year, 
fade.  In  other  words  a  great  step  forward,  toward 
settling  many  of  the  questions  which  now  vex  the 
whole  world,  will  have  been  taken. 


13.   Our  After- War  Opportunity 

All  this  being  the  case,  shall  we  leave  our  standard 
of  value  to  drift,  the  puppet  of  circumstances,  when 
we  can  so  easily  stabilize  it  ?  Are  we  going  to  let  the 
value  of  our  American  dollar  and  of  the  billions  upon 
billions  of  dollars'  worth  of  American  contracts  be 
the  shuttlecock  of  unknown  and  unknowable  European 
policies  after  the  war?  Are  we  forever  to  be  at  the 
mercy  of  conditions  over  which  we  have  no  control  ? 

And  be  it  noted  that  the  problems  for  Europe  will  be 
greatly  simplified  if,  for  once,  a  really  scientific  solu- 
tion of  the  problem  of  money  standards  is  reached  by 
one  nation. 

The  world  is  now,  as  never  before,  looking  to  us  for 
leadership.  It  is  our  golden  opportunity  to  set  world 
standards.  If  we  adopt  a  stable  standard  of  value,  it 
seems  certain  that  other  nations,  as  fast  as  they  can 
straighten  out  their  affairs  and  resume  specie  payments 


122  STABILIZING   THE   DOLLAR  [Chap.  V 

and  secure  again  stable  pars  of  exchange,  will  follow 
our  example.  After  gold  and  silver  fell  apart  in  1873, 
the  nations,  one  after  another,  adopted  the  common 
standard  of  gold  ;  and  now,  after  the  falling  asunder  of 
all  the  pars  of  international  exchange  from  the  World 
War,  the  new  order  will  probably  be  set  by  whatever 
nation  first  seizes  the  opportunity  and  takes  the  lead. 

14.   If  We  Miss  the  Opportunity 

If  we  do  not  do  this ;  if  we  do  not  provide  a  really 
scientific  remedy ;  if  we  take  the  ground  that  we  must 
drift  with  the  tides  of  gold  and  credit,  that  we  are  help- 
less to  rectify  or  prevent  in  the  future  the  great  social 
injustices  which  history  warns  us  will  surely  come,  as 
between  creditor  and  debtor,  wage  earner  and  employer, 
salaried  man  and  profit-taker,  we  shall  be  simply  fer- 
tilizing the  soil  of  public  opinion  for  a  crop  of  danger- 
ous radicalism.  Then  surely  some  demagogue  will 
flourish,  and  ofTer  some  ill-considered  remedy  which 
will  sweep  everything  before  it.  Then  shall  we  see,  not 
a  scientific  study  of  a  technical  problem  with  all 
parties  ready  for  an  equitable  settlement,  but  out- 
raged justice  calling  for  a  revengeful  policy  and  a  great 
selfish  class  struggle.  Discontent,  unrest,  suspicion, 
class  hatred,  violence,  charlatanism,  —  all  these  will 
follow.  And  even  if  out  of  such  unpromising  soil  a 
fairly  satisfactory  settlement  should  eventually  grow, 
bitterness  would  remain  ;  and  it  would  remain  so  deeply 
and  so  tenaciously  embedded  in  the  soil  that  we  would 
not  be  quit  of  it  for  generations. 

Even  if  our  shifting  dollar  were  guiltless  of  most  of 
the  offenses  charged,  even  if  the  high  cost  of  living  had 


Sec.  14]  CONCLUSION  123 

no  relation  to  the  dollar,  there  would  still  be  excellent 
reasons  for  standardizing  it  —  on  the  same  general  prin- 
ciple on  which  we  have  standardized  all  other  units. 
Accordingly,  a  friend  suggests  that  the  plan  be  pre- 
sented independently  of  the  "  cost  of  living  "  discussion, 
purely  as  a  problem  of  weights  and  measures. 

But  the  indictment  will  stand.  The  more  the  evi- 
dence in  the  case  is  studied,  the  deeper  will  grow  the 
public  conviction  that  our  shifting  dollar  is  responsible 
for  colossal  social  wrongs  and  is  all  the  more  at  fault 
because  these  wrongs  are  usually  attributed  to  other 
causes.  When  the  intelligent  pubhc  who  can  apply 
the  remedy  realize  that  our  dollar  is  the  great  pick- 
pocket, robbing  first  one  set  of  people  and  then  an- 
other, —  robbing  them  of  billions  of  dollars  a  year, 
confounding  business  calculations,  convulsing  trade, 
stirring  up  discontent,  fanning  the  flames  of  class 
hatred,  perverting  politics  and,  withal,  keeping  its 
sinister  operations  out  of  sight  and  unsuspected,  — 
when,  I  say,  the  public  and  legislators  realize  this, 
action  will  one  day  follow ;  and  we  shall  have  secured  a 
boon  for  all  future  generations,  a  stable  yardstick  of 
contracts,  a  stabilized  dollar. 


APPENDIX   I 

TECHNICAL   DETAILS 

I.   The  Reserve  against  Certificates 

A .  Stabilizing  the  Dollar  Would  Destabilize  the  Present 
100%  Reserve.  To  the  plan  for  stabilizing  the  dollar, 
as  described  in  Chapter  IV,  there  should  be  added  a 
proviso  of  some  kind  to  insure  the  permanent  adequacy 
of  the  gold  reserve. 

We  have  a  100%  Government  reserve  against  our 
present  gold  certificates.  These  certificates  are  really 
warehouse  receipts,  issued  at  the  rate  of  one  dollar 
for  every  23.22  grains  of  pure  gold  deposited,  and  re- 
deemable at  all  times  at  this  same  rate.  But,  under 
the  plan  here  proposed,  involving,  as  it  does,  varying 
the  weight  of  the  gold  dollar,  there  would  cease  to  be 
an  exact  equality  between  the  number  of  dollars  of  gold 
in  the  Treasury  and  the  number  of  dollars  of  certificates 
outstanding.  Either  might  exceed  the  other ;  or  first 
one  and  then  the  other  might  be  in  excess. 

Any  increase  of  the  dollar's  weight  decreases  auto- 
matically the  number  of  dollars  in  a  given  physical 
stock  of  bullion.  A  hundred  ounces  of  pure  gold  con- 
tains 2067  dollars  of  the  present  weight  of  23.22  grains 
of  pure  gold.  But  if  the  weight  of  the  dollar  were 
doubled,  the  100  ounces  would  contain  only  half  (1033|) 
that  number  of  dollars.  Or  if,  instead,  the  weight  of 
the  dollar  were  halved,  the  same  100  ounces  would  con- 
tain double  (4134)  that  number  of  dollars.  Thus  the 
Treasury  reserve  (even  if  there  were  no  variation  in  its 
physical  amount)  would  count  for  more  or  less  dollars 
according  to  what  a  dollar  might  happen  to  weigh  from 
time  to  time. 

125 


126  STABILIZING   THE    DOLLAR  [App.  I 

Suppose  that,  at  the  time  of  adopting  the  stabilization 
plan,  the  Treasury  bullion  behind  the  gold  certificates 
contained  23.22  billion  grains  of  pure  gold.  This  mass 
of  gold  would,  at  that  time,  count  as  one  billion  dollars 
of  23.22  grains  each  and  would  be  represented  by  one 
billion  dollars  of  certificates  in  circulation.  The  re- 
serve would  then  be  100%  of  the  certificates  against  it. 
But  as  soon  as  the  dollar's  weight  were  changed,  this 
exact  equality  would  disappear.  Suppose  the  dol- 
lar's weight  were  raised  1%  (from  23.22  to  23.4522 
grains).  Although,  at  the  instant  after  this  change, 
there  would  be  the  self -same  gold  in  the  reserve  and  the 
self-same  certificates  outstanding,  yet  the  number  of 
dollars  in  the  reserve  would  no  longer  be  a  billion  but 
about  990  millions  (or  exactly,  23.22  billion  grains -^ 
23.4522  grains).  The  gold  reserve  would  then  be  ap- 
proximately a  99%  reserve  instead  of  a  100%  reserve. 

On  the  other  hand,  a  reduction  of  the  dollar's  weight 
by  1%  would  increase  by  about  1%  the  number  of 
dollars  contained  in  a  physically  unchanged  reserve. 
In  this  case  the  gold  reserve  would  become  approxi- 
mately a  101%  reserve ! 

Thus  the  gold  dollar  certificates,  while  they  would  be 
certificates  exactly  like  our  present  gold  certificates  in 
that  (so  far  as  heretofore  provided  for)  they  come  into 
existence  only  by  the  deposit  of  gold  and  go  out  of  exist- 
ence only  by  their  redemption  in  gold,  would,  at  the 
same  time,  be  very  different  from  our  present  gold  cer- 
tificates in  that  they  would  no  longer  be  true  warehouse 
receipts.  Having  an  indefinite  reserve  behind  them, 
they  would  partake  of  the  nature  of  Government  notes. 

B.  Resiabilizing  the  100%  Reserve.  It  would,  of 
course,  be  perfectly  possible,  although  quite  unneces- 
sary, constantly  to  restore  the  reserve  to  100%. 
When  gold  was  depreciating  it  would  cost  the  Gov- 
ernment thus  to  replace  the  depreciation.  When, 
on  the  other  hand,  gold  was  appreciating  the  Gov- 
ernment would  reap  a  profit. 

If  the  reserve  became  less  than  the  certificates  it 


Sec.  1,  B]  TECHNICAL  DETAILS  127 

could  evidently  be  restored  to  equality  either  by  more 
gold  or  by  less  certificates.  The  simpler  method  would 
obviously  be  to  withdraw  from  circulation  and  cancel 
the  requisite  number  of  certificates.  Thus,  if  there  were 
$990,000,000  of  gold  reserve  and  $1,000,000,000  of  cer- 
tificates against  them,  the  Government  would  simply 
call  in  and  cancel  $10,000,000  of  certificates  obtained 
through  taxes  or  otherwise.  In  this  case  the  Govern- 
ment would  lose  that  sum. 

Reversely,  if  the  reserve  should  exceed  the  certifi- 
cates, the  equality  could  be  restored  either  by  less  gold 
or  more  certificates.  The  latter  method  would  be  the 
simpler.  The  Government  would  issue  and  put  into 
circulation  the  requisite  number  of  new  certificates,  in 
making  Government  expenditures.  Thus,  if  the  gold 
reserve  were  $1,010,000,000  and  the  certificates  out- 
standing were  only  $1,000,000,000,  the  Government 
would  print  and  issue  $10,000,000  of  new  certificates. 
In  this  case  the  Government  would  be  making  a  profit 
of  that  amount. 

Thus  the  circulation  of  certificates  would  be  regu- 
lated, by  issue  or  retirement,  so  as  always  to  be  equal 
to  the  number  of  dollars  in  the  reserve.  As  has  been 
stated,  the  issue  could  be  through  the  payment  by  the 
Government  to  the  public  for  expenses  of  any  kind 
from  time  to  time,  and  the  retirement  could  be  through 
the  payment  to  the  Government  of  taxes  or  other 
revenues  from  time  to  time. 

But,  as  promptness  of  regulation  is  desirable,  it  would 
be  best  to  anticipate  such  expenditures  or  receipts  so  as 
to  make  the  issue  or  retirement  follow  immediately  after 
the  appearance  of  any  discrepancy  between  the  reserve 
and  the  certificates.  Such  immediate  issue  or  retire- 
ment could  best  be  effected  by  depositing  certificates 
with  banks  or  withdrawing  deposits  therefrom.  In  this 
way  the  effect  of  issue  or  retirement  on  the  volume  of 
money  "  in  circulation,"  i.e.  outside  of  Government 
vaults,  would  be  immediate. 

These  dealings  with  banks  would  not,  of  course,  alter 


128  STABILIZING   THE    DOLLAR  [App.  I 

the  essential  fact  that,  in  the  last  analysis,  the  retire- 
ment of  certificates  would  be  through  taxes,  or  other 
revenues,  while  their  issue  would  make  possible  a  re- 
duction in  taxes. 

C.  The  Reactions  Involved  Thereby.  These  opera- 
tions of  canceling  old,  or  printing  new,  certificates 
to  make  the  certificates  even  with  the  gold  reserve 
would,  as  has  been  noted,  be  quite  apart  from  the 
routine  operations  of  redemption  and  issue  in  ex- 
change for  gold,  although,  of  course,  there  would  be 
reactions  between  the  two  sets  of  operations. 

Thus,  if  gold  is  depreciating  relatively  to  commodi- 
ties, as  shown  by  a  tendency  of  the  index  number  of 
commodity  prices  to  rise,  the  consequences  would  be 
that :  (1)  the  weight  of  the  gold  dollar  would  be  in- 
creased,  i.e.    the  price   of    gold   would    be   reduced ; 

(2)  the  deposit  of  gold  (issue  of  certificates)  would  be 
discouraged,  and  the  redemption  of  certificates  en- 
couraged, both  operations  tending  to  reduce  the  volume 
of  certificates  in  circulation ;  (3)  as  the  gold  reserve 
would  fall  below  100%,  some  of  the  certificates  in  the 
Government's  possession  would  be  destroyed  instead 
of  being  put  back  into  circulation,  thus  further  lessen- 
ing the  volume  of  certificates. 

The  third  of  these  operations  would  thus  reenforce 
the  second  in  effecting  contraction,  would  help  bring 
down  the  rising  index  number  to  par,  and  would  ob- 
viate, or  reduce  by  that  much,  the  need,  at  the  next 
adjustment  period,  of  a  further  increase  of  the  dollar's 
weight. 

If  gold  were  appreciating,  the  opposite  conditions 
would  obtain,  namely  :  (1)  the  dollar  would  be  reduced 
in  weight ;  (2)  the  deposit  of  gold  (issue  of  certificates) 
would   be   encouraged   and   redemption   discouraged ; 

(3)  new  certificates  would  be  created  and  issued  to 
bring  the  total  volume  of  certificates  up,  so  as  to  equal 
the  reserve.  The  effect  of  (3)  would  be  to  reenforce 
(2)  in  expanding  the  currency  and  bringing  up  the 
sinking  index  number ;  so  that  the  need  at  the  next 


Sec.  1,  D]  TECHNICAL  DETAILS  129 

adjustment  period  of  a  further  decrease  of  the  dol- 
lar's weight  would  be  lessened. 

In  short,  if  we  thus  keep  the  reserve  constant 
(relatively  to  the  certificates),  we  thereby  lessen  the  va- 
riations which  have  to  be  made  in  the  dollar's  weight. ^ 

D.  The  Definite-  and  the  Indefinite-Reserve  System 
Contrasted.  The  last  sentence  indicates  only  one  of 
several  interesting  contrasts  between  the  two  forms  of 
the  stabihzation  system — the  first,  or  indefinite-reserve 
system  (described  in  A  above),  in  which  the  reserve  is 
allowed  to  drift,  and  the  second,  or  definite-reserve  sys- 
tem (illustrated  in  B),  in  which  the  reserve  is  regulated. 

Under  the  "  indefinite-reserve  "  system  the  only  in- 
flow and  outflow  of  certificates  would  be  through  the 
deposit  and  withdrawal  of  gold,   just  as  at  present; 


^  It  wiU  be  noted  that,  if  gold  is  depreciating,  the  value  of  the 
gold  reserve  diminishes  and  taxation  (or  other  financing)  is  required 
to  keep  it  up  to  100%.  Under  such  circumstances  the  Grovernment 
is  in  the  position  of  the  holder  of  a  perishable  commodity.  Its  gold 
is  like  ripe  fruit  spoiling  on  its  hands  and  the  Treasury  suffers  a 
loss  accordingly.     It  taxes  the  public  to  provide  for  the  depreciation. 

The  loss  from  gold  depreciation  is  not,  however,  due  to  stabilizing 
the  dollar  and  maintaining  the  reserve.  The  same  loss,  in  some 
form,  occurs  whenever  gold  is  depreciating  and  whether  or  not  the 
dollar  is  stabilized.  Under  our  present  system  the  loss  falls  on  the 
individual  holder  of  gold  certificates  instead  of  on  the  Government 
Treasury.  Every  dollar  of  these  certificates  now  in  our  pockets 
shrinks  in  purchasing  power  whenever  gold  depreciates.  To 
stabilize  the  dollar  simply  affords  a  specific  measure  of  this  loss,  and 
the  operation  of  maintaining  the  reserve  translates  that  loss  into 
taxes. 

The  same  principle  applies  to  the  opposite  case.  Under  our 
present  system,  when  gold  appreciates  every  individual  holder  of 
gold  certificates  receives  an  increment  of  value.  The  gold  certifi- 
cates grow  in  value  in  our  pockets.  Under  the  system  of  a  stab- 
ilized dollar,  and  a  constant  100%  reserve,  the  Government 
Treasury  would  reap  this  advantage  and  bestow  it  back  on  the  public 
by  lightening,  by  that  much,  the  tax  burden. 

Thus,  maintaining  the  reserve  constant  at  100%  merely  changes 
the  form  of  the  gain  or  loss  alwaj^s  involved  when  the  gold  in  exist- 
ence varies  in  value.  Any  gain  or  loss,  under  the  stabilization  plan, 
would  simply  be  more  conspicuous  than  at  present,  entering  as  it 
would  into  Government  accounts. 

Such  gain  or  loss  must,  of  course,  not  be  confused  with  the  gains 
and  losses  of  contracting  parties  which  would  be  annihilated 
altogether  by  stabilization.     (See  Appendix  II,  §  1,  J.) 


130  STABILIZING   THE   DOLLAR  [App.  I 

whereas  under  the  ''  definite-reserve  "  system  there 
would  be,  in  addition,  an  inflow  and  outflow  of  certifi- 
cates through  special  issues  or  cancellations  to  keep  the 
total  outstanding  volume  of  certificates  in  tune  with 
the  gold  reserve. 

Under  the  "  indefinite  "  system  the  only  regulator 
of  the  price  level  consists  in  adjusting  the  weight  of 
the  dollar.  Under  the  "  definite  "  system  there  is  the 
added  regulator  of  directly  adjustmg  the  volume  of 
certificates. 

Both  regulators,  however,  act  on  the  price  level  by 
influencing  the  volume  of  certificates.  The  indefinite 
system  does  so  indirectly.  Under  this  system,  as  noted 
in  Chapter  IV,  §9,  when  the  dollar's  weight  is  de- 
creased, i.e.  the  price  of  gold  is  increased,  the  deposit  of 
gold  is  encouraged  (as  compared  with  what  it  would 
otherwise  be)  and  its  withdrawal  comparatively  dis- 
couraged, and,  as  we  know,  each  deposit  or  withdrawal 
of  gold  implies  an  issue  or  cancellation  of  certificates. 

In  short  and  practically,  the  "  indefinite  "  system 
depends  for  its  stabilizing  effect  on  affecting  or  prevent- 
ing the  international  movements  of  gold  which  would 
otherwise  happen,  whereas  the  "  definite  "  system  dis- 
penses with  the  need  of  interfering  with  the  gold  move- 
ments as  they  now  occur. 

The  "  indefinite  "  system  is  always  subject  to  the 
risk  of  a  breakdown,  whereas  the  "  definite  "  system 
is  not.  Under  the  "  indefinite  "  system  the  reserve 
might  sometime  sink  to  zero  and  redemption  become 
impossible,  whereas  under  the  "  definite  "  system  the 
adequacy  of  the  reserve  is  always  safeguarded. 

The  "  definite  "  system  would  act  more  promptly  to 
stabilize  the  price  level  than  would  the  "  indefinite," 
because,  for  one  reason,  the  change  in  the  circulation 
would  be  more  prompt.  The  instant  any  change  in  the 
dollar's  weight  is  made  there  is  a  change  in  the  number 
of  dollars  of  the  reserve,  and  the  volume  of  certificates 
is  readjusted  to  this  changed  reserve  immediately. 
Under  the  ''indefinite  "  system,  on  the  other  hand,  the 


Sec.  1,  E]  TECHNICAL  DETAILS  131 

circulation  would  be  affected  somewhat  more  slowly 
and  only  as  the  flow  of  gold  deposits  and  withdrawals 
became  changed. 

E.  Stabilization  in  Small  and  Large  Nations  Com- 
pared. The  displacement  of  gold  caused  or  averted  by 
the  operation  of  the  "  indefinite  "  system  would  react 
on  the  value  of  gold  per  unit  of  weight.  Practically, 
however,  this  effect  would  be  negligible  unless  the 
stabilization  system,  in  the  ''  indefinite  "  form,  were  in 
almost  universal  use.  Any  one  country,  —  at  any  rate, 
any  one  small  country,  like  Switzerland,  —  could  em- 
ploy the  "  indefinite "  system  without  appreciably 
disturbing  the  gold  market ;  for  any  displacement  of 
gold  which  such  a  country  could  cause  or  avert  would 
be  too  trifling  (in  relation  to  the  vast  reservoirs  of  gold 
outside  its  own  circulation)  to  affect  the  value,  i.e.  the 
purchasing  power,  of  gold  in  the  markets  of  the  world. 

But  if  a  large  country,  —  or  at  any  rate  a  large 
number  of  large  countries,  —  should  adopt  the  stabi- 
lization system  in  the  "indefinite"  form,  any  change 
caused  in  the  movements  of  gold  from,  or  into,  their 
circulation  might  be  so  great  as  to  glut  or  drain  the 
small  outside  reservoirs,  i.e.  the  gold  in  the  arts  and 
the  gold  in  the  circulation  of  any  countries  not  employ- 
ing the  system. 

An  acceleration  of  the  movement  of  gold  from  the 
country  or  countries  having  the  system  or  a  retardation 
of  the  movement  of  gold  to  them,  such  as  would  be 
caused  by  an  increase  in  weight  of  their  monetary  units, 
would  tend  sensibly  to  depreciate  the  world's  gold  and 
so  require  a  further  increase  of  weight  of  the  monetary 
units,  while  the  reverse  tendency  would  have  the  re- 
verse effect. 

The  result  would  be  that,  in  the  process  of  compen- 
sating for  the  tendency  of  prices  to  change  by  a  given 
percentage,  the  dollar's  weight  would  be  eventually 
changed  by  a  larger  percentage  than  would  be  the  case 
if  the  definite  reserve  system  were  used. 

Thus,  suppose  the  system  to  have  been  started  in 


132  STABILIZING   THE    DOLLAR  [App.  I 

1900  and  consider  the  situation  in  1915.  The  price 
level  would  then  have  been  kept  unchanged,  but  there 
would  have  been  an  increase  of  the  dollar's  weight  of 
more  than  30%  although  there  was  only  a  30%  rise  of 
prices  to  be  overcome. 

F.  A  50%  Minimum  Reserve.  The  maintenance  of 
the  100%  Government  gold  reserve,  as  described  in 
"5,"  is  only  one  of  several  possible  solutions  of  the 
reserve  problem.  It  is  the  one  which  would  fit  in  with 
the  idea  implied  in  our  present  system  of  gold  certifi- 
cates, namely,  the  idea  that  the  certificates  are  circu- 
lating proxies  for  gold. 

But  there  are  other  ways  of  solving  the  problem. 
One  is  simply  to  let  the  reserve  alone  so  long  as  it  re- 
mains in  excess  of  a  specified  safe  minimum  and  to  re- 
plenish it  only  when,  if  ever,  it  falls  below  that  minimum, 
i.e.  to  keep  the  indefinite-reserve  system  until  a  definite- 
reserve  system  became  necessary.  When,  if  ever,  the 
reserve  should  fall  to  that  minimum,  say  50%,  the 
principles  described  under  "  B  "  for  maintaining  a  100% 
reserve  would  thereafter  apply.  If  the  reserve  became 
insufficient,  in  other  words,  if,  at  any  time,  the  number 
of  dollars  of  certificates  outstanding  were  in  excess  of 
double  the  number  of  dollars  of  reserve,  the  excess  of 
certificates  would  be  retired. 

The  50%  limit  would  be  reached  if,  for  example,  the 
present  gold  reserve  remained  unchanged  in  physical 
amount  but,  after  a  time,  the  dollar's  weight  grew  to  be 
double  what  it  now  is. 

G.  How  Soon  Might  the  "  Indefinite  "  System  Reach 
Its  Limit  f  The  time  required  for  such  a  change,  should 
such  a  change  ever  occur,  would  depend,  of  course,  on 
the  rate  of  change  in  the  dollar,  following  the  rate  of 
depreciation  of  gold.  Let  us  take  a  case  which  is 
extreme  for  rapidity  of  depreciation  in  times  of  peace. 
Suppose  that  gold  should  depreciate  at  the  rate  it 
did  between  1896  (the  low  ebb  of  prices)  and  1914  (the 
coming  of  the  Great  War).  During  this  period  the 
price  level  rose  in  the  United  States  at  the  average  rate 


Sec.  1,  H]  TECHNICAL  DETAILS  133 

of  2^%  per  year,  which,  let  us  assume,  would  require  a 
yearly  increase  in  the  dollar's  weight  of  about  2^%. 
From  this  figure  we  can  calculate  the  time  required  to 
double  the  dollar's  weight,  and  to  reduce  by  half  the 
number  of  dollars  in  a  given  physical  reserve.  This 
would  be  twenty-eight  years. 

This  result  assumes  a  gold  reserve  unchanged  physi- 
cally. As  a  matter  of  fact,  the  reserve  would  increase 
slightly.  While  the  effect  of  the  system  would  be  to 
keep  gold  out  of  the  country,  this  effect  would  stop 
short  of  sending  it  out,  for  that  would  contract  the 
certificate  circulation  and,  unless  some  special  opposing 
cause  intervened,  reduce  the  price  level.  The  displace- 
ment effect  would  stop  at  the  point  which  would  main- 
tain the  price  level,  and  this,  in  a  growing  country, 
would  admit  of  a  slight  inflow  which  would  bring  the 
twenty-eight  years  mentioned  up  to  thirty  or  thirty-five. 

H.  A  Constant  50%  Reserve  and  a  Variable  Surplus. 
A  third  method  would  differ  from  the  second,  as  de- 
scribed in  "  D  "  above,  only  from  a  bookkeeping  point 
of  view.  There  would  be  some  advantage  in  separating 
off  any  surplus  gold  above  the  legal  50%.  This  "  sur- 
plus "  would  then  be  considered  as  a  secondary  reser- 
voir out  of  which  the  "  reserve  "  proper  could  be  main- 
tained at  a  constant  level  of  50%.  Reversely,  whenever 
this  "  reserve  "  should  tend  to  exceed  50%,  the  excess 
would  overflow  into  the  "  surplus."  The  "  reserve  " 
proper  would  then  be  maintained  at  an  unchanged 
ratio  at  all  times. 

We  may,  for  convenience  of  thought,  suppose  the 
"  reserve  "  and  the  "  surplus  "  to  be  kept  physically 
apart  in  two  separate  vaults  in  the  Treasury  and  every 
week,  or  every  day,  the  Treasury  accounts  to  be  squared 
off  and  gold  physically  transferred  between  the  two 
rooms,  in  whichever  direction  it  might  be  needed  to 
keep  the  "  reserve  "  at  50%  and  no  more.  We  should 
then  have  a  "  reserve  "  the  amount  of  which  (in  dollars, 
not  weight)  would  always  be  50%  of  outstanding  certifi- 
cates, and  a  "surplus"  which  would  represent  all  above 


134  STABILIZING   THE   DOLLAR  [App.  I 

50%,  the  percentage  varying  up  and  down  owing  to 
changes  in  the  declared  weight  of  the  dollar  as  well  as 
to  the  deposits  of  gold  and  the  brassage  receipts. 
Under  this  system  of  bookkeeping,  the  ''reserve " 
would  need  to  be  eked  out  (or  rather,  the  excess  cer- 
tificates would  need  to  be  retired)  at  the  expense  of  the 
Treasury  only  when,  if  ever,  the  "surplus"  should  dis- 
appear entirely. 

By  this  method  the  system  would  start  off  with  a 
large  bookkeeping  profit  for  the  Government. 

/.  Putting  the  Surplus  to  Work.  A  fourth  method, 
and  one  which  appeals  to  me  as  probably  the  best,  is 
very  similar  to  the  third,  described  in  ''  H/'  but  makes 
more  than  a  mere  bookkeeping  use  of  the  "  surplus." 
By  putting  the  idle  and  otherwise  useless  "  surplus  " 
to  work,  a  profit  could  be  earned  and  the  day  of  ex- 
hausting the  "  surplus  "  could  be  postponed  still  longer, 
if  not  indefinitely. 

So  far,  we  have  supposed  both  the  "  reserve  "  and 
the  "  surplus  "  to  be  kept  in  physical  gold.  But  only 
the  "  reserve  "  proper  need  be  so  kept.  Part,  or  all, 
of  the  "  surplus  "  representing  the  profit  with  which 
the  system  starts  might  be  invested  in,  i.e.  exchanged 
for.  Government  bonds  and  so  virtually  made  to  earn 
interest ;  for  any  bonds  thus  brought  into  the  "  sur- 
plus "  fund  would,  of  course,  earn  interest  for  that  fund 
just  as  truly  as  though  they  were  in  private  hands,  the 
general  fund  of  the  Treasury  paying  over  into  that 
"  surplus  "  fund  the  interest  which  would  otherwise 
have  to  be  paid  to  private  holders  of  these  bonds. 

This  system  would  recognize  the  needless  waste  in- 
volved in  a  100%,  or  other  high  "  reserve."  In  these 
days  of  economy  such  a  "  reserve  "  is,  as  one  economist 
has  said,  an  "  expensive  luxury  "  and  one  almost  pecul- 
iar to  the  United  States.  In  fact  we  are  already  dis- 
pensing with  it,  in  part,  by  virtually  converting  gold 
certificates  into  Federal  Reserve  notes. 

J.  Reactions  Therefrom.  It  should  be  pointed  out, 
however,   that  the  very  operation  of  converting  the 


Sec.  1,  J]  TECHNICAL  DETAILS  135 

idle  gold  surplus  into  an  active  bond  surplus  would, 
theoretically  at  least,  have  its  own  effects  on  the  value 
of  gold.  It  might  either  lower  or  raise  that  value.  The 
net  effect  would  be  the  resultant  of  two  opposite  ten- 
dencies. 

Of  these  two  the  tendency  to  lower  that  value  will 
be  explained  first.  This  tendency  can  be  clearly  pic- 
tured if  we  follow  the  processes  involved,  step  by  step. 
These  processes  are  best  followed  if  pictured,  not  as 
one  immediate  sale  of  the  entire  gold  surplus  for  bonds, 
but  as  a  gradual  sale,  extending  over  a  number  of  ad- 
justment periods. 

The  gold  thrown  on  the  market  to  buy  up  bonds 
would  mostly  find  its  way  out  of  circulation,  i.e,  go 
abroad  or  into  the  arts.  This  outflow  would  be  in- 
direct ;  for  presumably  the  original  bondholders  would 
not  wish  personally  to  deal  in  the  gold  bullion  supposed 
to  be  given  them  for  their  bonds.  They  would  hand 
back  this  bullion  to  the  Government  in  exchange  for 
gold  dollar  certificates,  just  as  though  it  were  new  gold 
from  the  mines. 

The  result  would  be  substantially  the  same  as  though 
the  bonds  were  bought  not  with  gold,  but  with  newly 
created  certificates,  the  gold  remaining  in  the  surplus. 

But  this  extra  output  of  certificates  would  not  remain 
in  circulation  but  would  disappear  again  and  be  canceled; 
for  they  would  tend  to  raise  the  index  number  and  lead 
to  an  increase  of  the  dollar's  weight,  i.e.  a  decrease  of 
the  price  of  gold,  and  there  would  be  a  decreased  inflow 
of  gold  from  the  mines  and  imports  and  an  increased 
outflow  into  the  arts  and  abroad,  i.e.  a  decrease  in 
certificates  issued  by  the  Government  to  miners  and 
gold  importers  and  an  increase  of  certificates  received 
by  the  Government  from  jewelers  and  gold  importers. 

The  upshot  is,  substantially,  that,  while  gold  would 
not  find  a  welcome  among  bondholders,  it  would,  as 
gradually  cheapened  at  successive  adjustment  periods, 
find  a  market  abroad,  or  in  the  arts.  That  is,  in  effect, 
the  gold  displaced  by  the  bonds,  after  being  bandied 


136  STABILIZING   THE    DOLLAR  [App.  I 

about  between  the  Government,  the  sellers  of  bonds, 
and  the  gold  exporters  and  jewelers,  would  go  abroad 
or  into  the  arts,  being  displaced  from  the  ''  surplus  " 
by  bonds. 

But,  the  dollar  being  now  heavier  than  before,  the 
gold  "  reserve  "  of  50%  would  be  proportionally  de- 
pleted, even  assuming  the  physical  gold  in  the  "reserve  " 
to  remain  unchanged,  and  so  would  have  to  be  replen- 
ished from  the  "  surplus." 

In  short,  the  original  '^  surplus,"  in  the  process  of 
being  converted  from  gold  into  bonds,  would  tend  to 
shi-ink  in  value.  It  would  so  tend  to  shrink  both  be- 
cause, if  the  gold  was  forced  on  the  market,  it  would 
have  to  be  sold  at  some  sacrifice  and  also  because  the 
resultant  impairment  of  the  "  reserve "  would  rob 
some  of  the  "  surplus  "  before  it  could  all  be  sold. 

We  are  now  ready  to  describe  the  opposite  tendency 
by  which  the  conversion  of  the  gold  surplus  into  a  bond 
surplus  would  work  toward  a  higher  value  of  gold.  The 
reactions  so  far  described  take  no  account  of  an  impor- 
tant indirect  effect  on  the  price  level  from  reducing  the 
volume  of  outstanding  bonds.  As  recent  war  experience 
has  illustrated,  bond  issues  tend  toward  inflation 
so  that  bond  retirements  would  tend  toward  contrac- 
tion. This  effect  would  be  considerable,  not  only  be- 
cause bonds  are  used  as  a  basis  for  circulating  bank 
notes  but  also  because,  as  the  most  convenient  form 
of  collateral  security  for  private  loans,  they  are  often 
made  the  basis  for  such  loans  and  so  for  deposits  sub- 
ject to  check.  The  withdrawal  into  the  Treasury  of 
bonds  would  thus  tend  to  contract  the  note  and  de- 
posit circulation  and  thereby  offset,  in  part  or  in  whole, 
the  expansion  from  the  issue  of  gold  dollar  certificates. 

After  the  supposed  initial  replacement  of  the  gold 
surplus  by  bonds,  if  the  reserve  needed  replenishment 
from  time  to  time,  or,  expressed  differently,  if  the  cer- 
tificates outstanding  needed  to  be  reduced,  the  surplus 
fund  would  simply  reconvert  some  of  its  bonds  into 
certificates  which  would  then   be  canceled  up   to  the 


Sec.  1,  K]  TECHNICAL  DETAILS  137 

point  necessary  to  restore  the  50%  ratio  of  reserve  to 
certificates  in  circulation.  The  maintenance  of  this 
ratio  by  the  method  here  described  would  cease  to  be 
possible  only  when  the  surplus  fund  should  be  ex- 
hausted. It  could  then  buy  up  no  more  certificates 
and  recourse  would  need  to  be  had  to  taxation,  as  pre- 
viously explained.     (See  "  B  "  above.) 

K.  The  Interest  on  Surplus  Would  Save  Taxes.  As 
long  as  the  surplus  earned  any  interest  the  expense  of 
replenishing  the  reserve  would  be  borne  in  part,  or  in 
whole,  by  this  interest  earned.  It  is  roughly  estimated 
that  interest  earned  on  this  surplus  would  extend  the 
35  year  period,  in  the  imaginary  example  mentioned 
under  "  G,"  to  about  50  years.  If,  instead  of  the  very 
high  rate  of  2^%  per  annum  for  the  accretion  of  the 
dollar's  weight,  we  were  to  assume  a  H%  per  annum 
rate,  which  would  itself  be  a  high  rate,  the  net  result 
of  the  calculation,  under  the  same  assumptions,  is  that 
the  investment  of  the  surplus  would  about  meet  the  loss 
indefinitely.  In  this  case  the  ''  indefinite  "  system  would 
last  indefinitely  and  require  no  taxation. 

L.  The  Future.  These  calculations  are,  of  course, 
purely  illustrative.  No  one  can  guarantee,  for  instance, 
that  great  gold  depreciation  is  not  in  store  for  us  from 
extraneous  sources. 

If  this  depreciation  should  be  so  rapid  as  to  make 
the  cost  to  the  Government  of  stabilization  a  matter  of 
real  moment,  —  if,  for  instance,  science  should  find  a 
way  to  extract  profitably  the  enormous  amounts  of 
gold  now  held  in  the  southern  clays,  or  in  sea  water, 
or  in  the  alluvial  deposits  said  to  be  at  the  mouth  of 
the  Sacramento  River,  —  then  the  time  would  clearly 
have  arrived  for  dispensing  with  the  gold  standard 
altogether,  just  as  we  would  dispense  with  a  standard 
based  on  decaying  fruit  and  adopt  something  more  re- 
tentive of  value. 

At  any  rate,  the  expense  to  the  Government  of  such 
a  future  possible  cataclysm  is  no  argument  against 
stabilization ;  for,    as   we   have   seen,   if   depreciation 


138  STABILIZING   THE   DOLLAR  [App.  I 

comes,  its  cost  must  be  borne  by  the  people  anyway, 
whether  the  dollar  is  stabilized  or  not.  The  argument 
is  rather  the  other  way;  for  the  private  individual 
ought  not  to  be  forced  to  take  a  gamble  as  to  the  value 
of  the  money  he  carries  any  more  than  as  to  the  vari- 
ations of  any  other  unit. 

Instead  of  taking  such  drastic  action  as  to  give  up 
the  gold  standard,  we  could,  if  we  chose,  make  gold  it- 
self less  perishable  in  value  by  limiting  its  production, 
just  as  diamond  mines  Umit  the  production  of  diamonds 
in  order  to  maintain  their  value.  Such  a  control  of 
gold  production  would  simplify  the  problem  of  stabi- 
lization ;  for  it  would  be  a  partial  stabilization  itself. 
It  would  be  the  first  rough  adjustment,  by  hand  as  it 
were,  of  a  scientific  instrument,  made  in  advance  of 
the  finer  adjustments  by  means  of  a  micrometer, — 
i.e.  the  index  number. 

If,  on  the  other  hand,  gold  should,  without  any  Gov- 
ernment interference,  become  scarce  and  appreciate, 
the  monetary  system  would  be  earning  a  handsome 
profit  for  the  Government. 

M.  Summary.  Each  change  in  the  dollar's  weight 
changes  the  number  of  gold  dollars  in  the  reserve  and 
disturbs  the  ratio  of  reserve  to  certificates. 

If  gold  appreciates,  or  does  not  depreciate  too  far, 
the  reserve  will  always  be  adequate  to  insure  redemp- 
tion. But  as  there  is  always  the  possibility  of  an 
excessive  depreciation  of  gold,  some  method  of  insuring 
an  adequate  reserve  should  be  provided.  Of  several 
possible  methods,  the  best  seems  to  be :  to  fix  a  definite 
ratio  of  reserve  to  certificates,  such  as  50%,  which  shall 
always  be  maintained ;  to  appropriate  at  the  outset, 
to  the  profit  of  the  Government,  all  surplus  above  the 
50%  and  invest  it  in  Government  bonds ;  likewise,  in 
the  future,  to  appropriate,  to  the  profit  of  the  Govern- 
ment, any  further  surplus  which  may  accrue  and  to 
defray,  at  Government  cost,  any  expense  involved  in 
bringing  the  reserve  up  to  the  50%  Hmit. 

These  Government  gains  and  losses  are  not  new  but 


l( 


Sec.  2,  A]  TECHNICAL  DETAILS  139 

merely  transformed.  They  are  the  same  gains  and 
losses  which,  under  our  present  system,  are  felt  by  the 
public  as  individuals. 

The  maintenance  of  a  definite  ratio  of  reserve  to  cer- 
tificates compels  both  of  them  to  expand  or  contract 
in  unison  and  leaves  the  currents  of  gold  between  coun- 
tries and  between  the  arts  and  the  currency  substan- 
tially as  they  are  at  present. 

An  "  indefinite  "  reserve  system  would  disturb  those 
currents  somewhat,  mitigating  a  flood  of  gold  into  the 
country  or  an  ebb  of  gold  out  of  it,  and,  if  the  country 
be  a  large  one,  affecting  the  value  of  gold. 

2.   Speculation  in  Gold 

A.  Preventing  "  Overnight "  Speculation.  The  best 
brassage''  fee.  In  the  text  (Chapter  IV,  §  10)  it  was 
briefly  stated  that  a  small  fee  should  be  charged  by  the 
Government  for  the  deposit  of  gold.^  This  fee  would 
correspond  somewhat  to  the  old  "  brassage  "  charge  for 
coinage  and  may,  for  convenience,  be  so  called.  Its 
object,  however,  is  not  primarily  to  defray  the  expense 
of  the  mint  office  but  to  prevent  speculation  in  gold, 
injurious  to  the  Government. 

Without    some    such    safeguard    the    Government 

^  The  weight  of  the  gold  bullion  doUar,  at  any  time,  may  be  called 
the  redemption-weight  of  gold,  i.e.  the  weight  of  gold  in  which  a  gold 
bullion  dollar  certificate  can  be  redeemed.  The  amount  of  gold  which 
must  be  deposited  at  any  time  for  a  gold  bullion  dollar  certificate 
may  be  called  the  deposit-weight  of  gold  (corresponding  to  the 
present  mint-weight).  This  exceeds  the  redemption-weight  (i.e.  the 
"dollar")  by  the  brassage  fee.  If  this  fee  be  1%,  reckoned  on  the 
dollar's  weight,  and  the  dollar's  weight  (in  pure  gold)  were  23.22 
grains  as  at  present,  this  fee  would  be  .2322  grains.  Hence  the 
depositor  of  gold,  in  order  to  receive  a  dollar  of  certificates,  would 
have  to  deposit  not  only  a  dollar  of  gold  bullion  (23.22  grains) 
but  a  "brassage"  fee  of  .2322  grains  besides,  or  23.4522  grains  in  all. 
In  other  words,  while  the  redemption-])rice  would  be  $20.67  an 
ounce  {i.e.  480  grains  in  an  ounce  -H  23.22  grains  in  a  dollar)  the 
depositor  of  gold  would  receive  a  deposit-price  (corresponding  to  the 
present  mint-price )  not  of  $20.67  an  ounce,  but  of  480  ^  23.4322 
or  $20.47.  Under  this  system  of  terminology  the  dollar  and  the 
official  price  of  gold  are  defined  in  terms  of  redemption,  not  of 
deposit,  which  latter  involves  the  brassage  fee  as  well. 


140  STABILIZING   THE    DOLLAR  [App.  I 

would  be  in  danger  of  sustaining  loss  every  time  a  pro- 
spective change  of  the  dollar's  weight  and  the  price  of 
gold  was  known.  For  instance,  if,  at  any  time,  the 
Government  stood  ready  to  buy  or  sell  gold  at,  say, 
$20.00  per  ounce  and  if  it  were  known  that  to-morrow 
that  price  would  be  raised  to  $20.10,  speculators  could 
to-day  buy,  of  the  Government,  gold  bullion  at  $20.00 
and  sell  it  back  to-morrow  at  $20.10,  thus  pocketing  a 
profit  of  10  cents  an  ounce  overnight  at  the  expense  of 
the  Government.  Were  this  operation  allowed  or 
made  possible,  it  would  be  costly  to  the  Government 
Treasury  and  might  temporarily  deplete  its  gold  re- 
serve. 

The  opposite  speculation  would,  were  it  not  pre- 
vented, accompany  a  drop  in  the  official  price.  Specu- 
lators who  possessed  stocks  of  gold  could  conceivably 
sell  to  the  Government  to-day  at,  say,  $18.00  and  buy 
back  to-morrow  at  $17.90,  likewise  profiting  10  cents  an 
ounce  at  the  expense  of  the  Government,  This  last 
operation  would  also  be  costly  to  the  Government, 
though  it  would  (during  the  period  of  operation)  in- 
crease its  gold  reserve. 

But  the  "  brassage "  requirement  would  effec- 
tually protect  the  Government  from  either  sort  of 
speculation.  The  Treasury  would  be  put  thereby  in 
the  usual  position  of  any  merchant  or  broker,  charging, 
at  any  time,  a  slightly  higher  price  than  it  pays  at  that 
time  and  making  a  profit.  This  profit,  or  brassage, 
would  be  the  Government's  fee  for  its  services  in  main- 
taining the  monetary  system .  Wedged  between  the  two 
Government  prices,  it  would  remain  a  fixed  percent- 
age, say,  1%,  so  that  the  pair  of  prices  would  rise 
or  fall  together. 

In  order  that  this  margin  should  always  fully  safe- 
guard the  Government  it  should  be  provided  in  the 
plan  that  the  extent  of  any  one  shift  in  the  pair  of 
prices,  whether  that  shift  be  upward  or  downward, 
must  never  exceed  the  margin  or  brassage  fee.  Thus,  if 
the  fee  is  1%,  no  one  shift  could  be  more  than  1%. 


Sec.  2,  A]  TECHNICAL  DETAILS  141 

Evidently  such  a  limitation  would  effectually  stop 
any  embarrassing  speculation.  Thus  suppose  the  fee 
to  be  1%  on  the  Government's  deposit  —  or  buying  — 
price,  which  to-day  is,  say,  S18.00.  Then  the  pair  of 
Government  prices,  to-day,  will  be : 

For  buying  gold $18.00 

For  selling  gold 18.18 

Suppose  that  to-morrow  both  prices  are  to  be  raised 
17  cents,  almost  to  the  limit  of  1%,  or  so  as  to  be : 

For  buying  gold $18.17 

For  selling  gold 18.35 

Clearly  a  speculator  who  tried  to  profit  on  the  rising 
market  would  fail ;  for  he  would  have  to  give  to-day 
$18.18  and  would  get  to-morrow  only  $18.17,  actually 
losing  1  cent  an  ounce.  Evidently,  at  best  {i.e.  if  the 
shift  were  not  17  but  the  full  1%,  or  18  cents),  he  would 
come  out  only  even. 

Reversely,  if  the  pair  of  Government  prices  are 
marked  down  nearly  to  the  limit,  say,  by  16  cents,  or 
from 

a  buying  price  of  $18.00 
and  a  selling  price  of    18.18 
to 

a  buying  price  of  $17.84 
and  a  selling  price  of    18.02, 

clearly  the  speculator  cannot  profit  by  the  fall.  To 
attempt  it  would  mean  to  let  the  Government  buy  his 
gold  to-day  at  $18.00  and  sell  it  back  to  him  to-morrow 
at  $18.02,  causing  him  actually  to  lose  two  cents  an 
ounce.  Evidently  at  best  (i.e.  if  the  shift  were  not 
16  cents  but  the  full  1%,  or  18  cents)  he  would  come  out 
only  even. 

It  is  true  that  this  limitation  imposed  on  the  shift, 
up  or  down,  of  the  pair  of  official  prices,  while  it  would 


142  STABILIZING   THE    DOLLAR  [App.  I 

effectually  stop  injurious  speculation,  might,  in  some 
cases  and  for  the  time  being,  prevent  the  full  adjust- 
ment in  the  dollar's  weight  (and  in  the  price  of  gold) 
called  for  by  the  index  number. 

Thus  the  index  number  might  indicate  a  change  of 
2%  in  gold  prices,  while  only  1%  was  permitted  under 
the  restriction  mentioned.  Suppose  the  redemption- 
price  of  gold  to  be  $18.00  and  the  deposit-price  1%  less, 
or  $17.82.  Suppose,  further,  the  index  number  at 
some  adjustment  period  to  be  found  to  be  2%  above 
par.  Then,  it  is  true,  the  price  of  gold  could  not  be 
changed  more  than  1%,  or  18  cents.  Instead  of  being 
reduced  the  full  2%,  or  36  cents,  as  would  be  the  case 
if  there  were  no  restriction,  the  redemption  price  would, 
on  account  of  the  1%  restriction,  only  be  reduced  from 
$18.00  to  $17.82  (instead  of  to  $17.64)  and  the  de- 
posit price  from  $17.82  to  $17.64  (instead  of  to  $17.46). 

The  sacrifice  in  efficiency  of  the  system  here  impUed 
is,  however,  insignificant, ^  assuming,  of  course,  that 
the  fee  or  margin  is  wisely  chosen  in  reference  to  the 
adjustment  period.  And  even  if  the  sacrifice  of 
efficiency  were  greater,  the  superiority  of  a  merely 
partial  adjustment  over  the  present  unyielding  system 
of  no  adjustment  at  all  would  be  very  great. 

If  the  adjustment  is  to  occur  monthly,  or  bi-monthly, 
a  brassage  of  1%  would  seldom  hamper  stabilization 
appreciably;  if  quarterly,  2%  might  better  be  used, 
as  giving  more  latitude.  I  incline,  however,  toward  a 
bi-monthly  adjustment  period  and  a  1%  fee,  the  prices 
being  quoted,  let  us  say,  for  the  first  Wednesday  of 
January  and  of  every  alternate  month  and  the  result- 
ant index  number  proclaimed  and  made  effective  on  the 
Wednesday  following  or  earlier.  Calculations  with  a 
1%  fee  applied  to  the  actual  prices  of  1900-1914  seem 
to  justify  this  choice. 

B.  Speculation  beyond  One  Adjustment  Period.  The 
only  kind  of  speculation  thus  far  considered  is  the 
"  overnight  "  variety  based  on  a  foreknown  change  in 

^  This  is  shown  in  figures  in  §  9  below. 


Sec.  2,  B]  TECHNICAL  DETAILS  143 

the  Government  prices  of  gold ;  and  this  is  the  only- 
kind  against  which  any  safeguard  is  necessary. 

We  may,  however,  add  here  a  short  statement  as  to 
other  kinds  of  speculation  in  gold,  in  order,  chiefly,  to 
show  that  no  provision  against  them  is  needed.  It  is 
conceivable  that  a  speculator  might  buy  (or  sell)  gold 
to-day  in  order  to  resell  to  (or  to  rebuy  of)  the  Govern- 
ment after,  not  the  next,  but  some  succeeding  adjust- 
ment. Assume,  for  simplicity,  that  the  adjustment  is 
monthly  and  limited  to  a  1%  increase  or  decrease. 
While  the  brassage  fee  of  1%  would  effectually  prevent 
a  speculator  from  buying  (or  selling)  in  January  in 
order  to  resell  or  rebuy  in  February,  it  would  not  prevent 
him  from  an  operation  extending  from  January  to 
March  or  later  months  in  the  hope  that  the  first  shift 
of  gold  prices,  —  that,  say,  on  February  1,  —  might 
be  followed  by  others  in  the  same  direction. 

First  consider  bull  operations.  Thus,  if  the  Govern- 
ment is  buying  gold  on  January  31  at  S20.00  an  ounce 
and  selling  it  at  1%  more,  or  $20.20,  and  if  the  specula- 
tor knows  that  on  the  following  day,  February  1, 
this  pair  of  prices  will  be  advanced  the  full  limit  of  1% 
and  hopes  that  on  March  1  it  will  be  advanced  an- 
other 1%,  while  it  is  true  that  he  could  make  no  profit 
by  selling  in  February,  he  could,  evidently,  if  his  highest 
hope  were  realized,  make  a  1%  profit  by  selling  in 
March,  and  he  may,  if  he  chooses  to  take  the  risk  in- 
volved, speculate  in  that  hope.  That  is,  he  may  buy 
gold  of  the  Government  in  January,  planning  to  re- 
sell it  to  the  Government  in  March  or  later,  the  mini- 
mum period  for  the  turnover  being  a  month  and  a  day. 

But  will  he?  Seldom,  if  ever,  and  for  several 
reasons !  In  the  first  place,  opportunities  for  such 
gain  will  be  few  and  far  between.  The  maximum  gain 
possible  will  be  1%  a  month  and  that  maximum  will 
seldom  continue.  So  far  as  statistics  are  available  to  tell 
us,  gold  has  very  seldom  appreciated  for  a  year  more 
than  5%  and  never  as  much  as  10%  (except  once  in 
greenback  days  when  gold  was  not  the  standard). 


144  STABILIZING   THE   DOLLAR  [App.  I 

In  the  second  place,  against  these  small  possible 
gains  which  might  present  themselves  from  time  to 
time,  the  speculator  would  have  to  reckon  with  large, 
if  not  prohibitive,  expenses.  Prominent  among  them 
would  be  interest.  If  the  rise  per  cent  in  the  price  of 
gold  is  less  than  the  rate  of  interest  he  will  be  a  loser 
anyway.  If  he  has  to  pay  5%  for  "  carrying  "  his  load 
through  the  year  and,  at  the  end,  the  price  of  gold  has 
risen  5%,  he  has  not  even  earned  interest.  For  when 
he  closes  his  operation  and  sells  gold  back  to  the  Govern- 
ment, the  brassage  charge  of  1%  must  be  paid,  and  be- 
sides these  two  expenses  are  expenses  for  cartage  of  the 
gold  from  the  Government  vaults  and  back,  storage 
charges  in  the  interim,  and  insurance. 

Another  obstacle  is  the  difficulty  of  assembling  the 
yellowbacks  necessary  to  begin  such  a  bull  operation. 
If  they  are  kept  ready  in  advance,  the  interest  expense 
involved  in  "  carrying  "  them  would  be  much  more 
than  merely  the  interest  for  the  period  of  the  specula- 
tive operation. 

Finally,  of  course,  the  risk  of  failure  in  such  an 
operation  has  always  to  be  reckoned  with.  The  only 
case  in  which  such  speculation  would  be  reasonably 
likely  to  succeed  would  be  when,  in  any  month,  the  1% 
rise  in  the  price  of  gold  were  inadequate  completely  to 
meet  the  fall  of  the  index  number,  so  as  to  create  the 
presumption  that  it,  the  price  of  gold,  would  be  raised 
again  in  the  following  month.  If  a  rise  of  1%  were 
announced  for  February  1,  which  was  several  per 
cent  less  than  the  fall  in  the  index  number,  there  would 
be  a  high  probability  that  a  month-and-a-day  bull  opera- 
tion would  yield  a  gross  profit  of  1%,  the  net  profit,  if 
any,  being  what  is  left  of  that  1%  after  deduction  of 
expenses.  But  this  is  scarcely  an  attractive  speculative 
proposition. 

We  conclude:  (1)  that  for  short  periods,  like  two  or 
three  months,  the  expenses,  —  e.g.  the  expense  for  the 
cartage  of  gold  away  from  and  back  to  the  Government 
vaults  and  the  expense,  time,  and  labor  of  preparation 


Sec.  2,  B]  TECHNICAL   DETAILS  145 

in  order  suddenly  to  assemble  the  yellowbacks  (or  else 
to  "  carry  "  them  for  long  beforehand),  would  be  prohibi- 
tive ;  and  (2)  that  for  long  periods,  like  a  year,  the  risk 
would  be  prohibitive.  It  is  clear,  then,  that  specula- 
tion of  the  sort  here  discussed  would  be  conspicuous  by 
its  absence. 

The  effect  of  any  such  speculation,  so  far  as  it  did 
exist,  would,  of  course,  be  to  cause  expense  to  the 
Government  or  rather  deprive  it  of  the  profit  it  would 
have  made  if  the  gold  which  the  speculator  held  for  a 
rise  had  been  held  by  itself ;  the  temporary  withdrawal  of 
gold  from  the  Government  reserve  should  also  perhaps 
be  counted  as  a  slight  disadvantage  to  the  Government. 

But  this  is  only  a  small  part  of  the  picture.  As  we 
have  seen  in  the  previous  section,  the  Government, 
during  such  a  period  of  gold  appreciation  as  we  have 
supposed,  would  itself  be  in  the  very  position  of  the 
bull  speculator  and  on  an  immeasurably  larger  scale. 
It  would,  as  it  were,  be  holding  for  a  rise  its  entire  gold 
reserve.  Its  percentage  of  reserve  would  be  gaining 
and  might,  conceivably,  even  grow  to  exceed  a  100% 
reserve.  The  speculator's  losses,  if  any,  would  there- 
fore simply  be  a  negligible  offset  against  the  Govern- 
ment's own  gains  from  the  rising  tide  of  gold  value. ^ 

^  If  the  view  wMch  has  been  given  (that  such  buU  speculation 
would  be  too  trifling  to  require  any  special  provisions  against  it) 
were  incorrect,  —  if,  after  all,  the  Government  might  be  seriously 
embarrassed,  —  such  a  raid  on  the  Treasury  could  be  altogether 
avoided  by  a  special  proviso :  the  price  of  gold  could  be  further 
restricted,  so  far  as  any  upward  change  is  concerned,  so  as  not  to 
be  raised  more  than,  say,  one  half  of  one  per  cent  a  month,  i.e.  at 
so  small  a  rate,  at  most,  as  to  be  more  than  offset  by  the  inter- 
est, etc.,  which  the  bull  speculator  would  have  to  carry. 

This  restriction  would  only  slightly  hamper  the  stabilizing 
process ;  for  it  is  only  seldom,  and  never  for  long  periods,  that  gold 
has  appreciated  relatively  to  goods  more  than  one  half  of  one  per  cent 
a  month.  This  safeguard  is  mentioned,  however,  merely  to  meet 
completely  all  possible  objections,  however  far-fetched  or  imaginary. 
Such  a  proviso  would,  I  believe,  be  as  superfluous  as  it  would  be 
innocuous. 

If,  as  I  suggested  in  ",1"  above,  the  brassage  were  1%  and  the 
adjustment  period  two  months  the  terms  of  the  restriction  just 
mentioned  would  be  met  anyway.     ; 


146  STABILIZING   THE    DOLLAR  [App.  I 

But  let  us  return  to  the  contention  that  such  bull 
speculation  would  be  practically  non-existent.  The 
price  movements  needed  for  it  seldom  occur,  and  when 
they  do  occur  are  not  foreseen.  In  fact,  if  price  move- 
ments were  so  well  foreseen,  the  evils  which  this  book 
proposes  to  remedy  would  not  be  very  serious ! 

Somewhat  the  same  considerations  apply  to  the 
opposite  sort  of  speculation,  that  of  the  bear  operator. 
But  this  type  of  operation,  —  first  selling  gold  to  the 
Government  and  then  buying  it  back  at  a  lower  price 
some  months  later, — would  amount  to  lending  the 
Government  temporarily  an  addition  to  its  gold  reserve. 
It  would  be  helping  the  reserve  when,  because  of  its 
depreciation  in  value,  it  would  need  help.  Practically, 
the  advantage  to  the  Government  from  such  an  opera- 
tion would  be  small ;  for  the  possible  bear  operations 
would  be  limited  to  very  small  dimensions  by  the  fact 
that  only  small  amounts  of  idle  gold  bullion  are  avail- 
able, i.e.  could  be,  at  any  moment,  found  in  stock  out- 
side the  Treasury  and  so  be  capable  of  being  immedi- 
ately deposited  there  for  the  period  of  the  supposed 
bear  operation. 

C.  Unofficial  Prices  of  Gold.  We  have  spoken  only 
of  the  official  pair  of  prices  of  gold.  These  are  like  the 
two  "  gold  points  "  in  foreign  exchange  or  the  two 
limits  used  in  the  gold  exchange  standard.  As  dis- 
tinct from  these  two  official  Government  prices  of  gold 
bullion,  the  actual  price  in  the  open  market  might  be  at 
any  point  within  these  two  limits,  just  as  the  price  of 
foreign  exchange  may  be  any  price  within  the  "  gold 
points." 

The  market  price  could  never  lie  outside  these 
limits.  It  could  never  exceed  the  redemption-price ; 
for  no  one  would  pay  more  for  gold  than  the  price 
asked  by  the  Government.  Nor  could  it  fall  below  the 
deposit-price ;  for  no  one  would  take  less  for  his  gold 
than  he  could  get  for  it  from  the  Government. 

But,  within  the  range  set  by  these  two  official 
prices,  the  market  price  could  float  unhampered.     Thus, 


Sec.  3]  TECHNICAL  DETAILS  147 

if  the  limiting,  or  official,  prices  were  $18.00  and  $18.18, 
the  market  price  might  be  $18.10.  There  would,  so 
long  as  this  intermediate  price  ruled  in  the  market,  be 
no  actual  redeeming  or  depositing.  For  no  one  would 
sell  bullion  to  the  Government  for  $18.00  an  ounce 
when  he  could  get  $18.10  in  the  open  market,  nor 
would  any  one  buy  bullion  of  the  Government  for 
$18.18  an  ounce  when  he  only  needs  to  pay  $18.10 
for  it  in  the  open  market. 

Evidently,  therefore,  the  deposit  of  gold  would  only 
take  place  when  the  deposit-price,  i.e.  the  lower  limit, 
ruled  the  market ;  and  its  redemption  would  only  take 
place  when  the  redemption-price,  i.e.  the  upper  limit, 
ruled  the  market.  The  buying  and  selling  of  gold 
within  the  two  official  price  limits  would  thus  not 
directly  concern  the  Government. 

D.  Conclusion.  Our  main  conclusion  is  that  specu- 
lation in  gold,  whether  or  not  the  Government  be  in- 
volved as  a  buyer  or  seller,  would,  if  the  brassage  safe- 
guard be  used,  not  embarrass  the  Government  finances 
nor  affect  the  smooth  worldng  of  the  plan  for  stabiliz- 
ing the  dollar.  Moreover,  such  speculation  would  be 
negligible,  probably  more  so  than  speculation  in  silver 
to-day. 

3.   Selection  of  the  Index  Number 

The  method  of  stabilizing  the  dollar  set  forth  in  this 
book  consists  in  periodically  readjusting  the  weight  of 
the  gold  dollar  so  as  to  make  its  purchasing  power 
correspond  to  an  ideal  composite  dollar  of  commodi- 
ties. The  criterion  for  this  adjustment  is  an  index 
number  of  prices.  Consequently  the  selection  of  the 
right  type  of  index  number  is  one  of  the  essential  de- 
tails of  the  plan. 

Many  different  methods  of  averaging  and  of  weight- 
ing and  many  different  selections  of  commodities, 
sources,  and  periods  of  price  quotations  have  been 
used  or  suggested,  making  many  sorts  of  index  numbers. 


148  STABILIZING   THE    DOLLAR  [App.  I 

The  selection  of  the  best  index  number  is  a  fascinat- 
ing subject.  It  is  a  curious  fact,  however,  that 
index  numbers  of  different  types  usually  agree  with 
each  other  remarkably  well,  whatever  the  formula  for 
calculation,  the  method  of  weighting,  the  number  of 
commodities,  etc. 

In  Chapter  I  some  diagrams  illustrating  this  im- 
portant fact  were  given.  Any  reader  unconvinced  as 
to  the  correctness  of  this  conclusion  has  only  to  con- 
sult the  literature  on  the  subject  indicated  in  Appen- 
dix VI  (especially  the  writings  of  Mitchell  and  Edge- 
worth)  in  order  to  be  reassured. 

Nevertheless,  there  are  always  some  differences  be- 
tween the  movements  of  different  index  numbers,  and 
occasionally  these  differences  are  large.  Therefore, 
just  as,  in  determining  the  physical  yardstick,  it  is 
worth  while  to  eUminate  the  effects  of  temperature  and 
other  disturbing  factors  in  order  to  obtain  a  unit  as 
nearly  perfect  as  practicable,  so  it  is  worth  while  to 
construct  an  index  number  as  nearly  perfect  as  possible. 

I  shall  therefore  indicate  the  points  which  seem  to 
me  of  most  importance. 

The  chief  factors  of  an  index  number  are :  (1)  the 
agency  authorized  to  calculate  the  index  number ; 
(2)  the  markets  and  sources  of  quotations ;  (3)  the 
kinds  of  prices  (i.e.  wholesale  or  retail,  etc.)  to  be 
quoted  ;  (4)  the  list  of  goods  to  be  included ;  (5)  the 
frequency  of  calculation ;  (6)  the  formula  for  calcula- 
tion. 

Out  of  the  wide  range  of  choice  presented  under 
each  of  these  six  heads  I  would,  tentatively  at  least, 
make  my  own  choices  as  follows  : 

(1)  The  calculation  of  the  index  number  might  well 
be  put  in  the  hands  of  the  Bureau  of  Standards  which 
now  has  charge  of  standardizing  every  unit  other 
than  the  money  unit.  An  alternative  is  the  Bureau  of 
Labor  Statistics  which  now  publishes  excellent  index 
numbers  of  prices  for  other  purposes. 

(2)  The  markets  should  be  the  chief  public  markets 


Sec.  3]  TECHNICAL  DETAILS  149 

of  the  United  States  such  as  those  now  used  by  the 
United  States  Bureau  of  Labor  Statistics ;  and  the 
sources,  government  agents,  standard  trade  journals, 
and  books  of  business  houses. 

(3)  Only  wholesale  prices  should,  I  think,  be  used. 
We  could  not  profitably  use  retail  prices  or  prices  of 
labor  (wages)  or  the  prices  of  securities  or  the  prices  of 
real  estate  or  rents. 

There  are  several  reasons  for  the  restriction  to 
wholesale  commodity  prices,  especially  :  (a)  the  greater 
ease  of  fixing  or  standardizing  definite  grades  of  whole- 
sale commodities  than  of  any  of  the  other  classes  of 
goods  mentioned ;  (6)  the  greater  importance  of 
wholesale  trade  and  the  fact  that  most  important  con- 
tracting parties  are  more  concerned  with  wholesale 
prices  than  with  retail ;  (c)  the  greater  sensitiveness 
of  wholesale  prices  to  the  influences  which  affect 
price  levels ;  (d)  the  fact  that  stabilization  of  the 
wholesale  index  number  will  carry  with  it  the  stabiliza- 
tion of  the  level  of  retail  prices  far  more  promptly  and 
fully  than  vice  versa. 

The  last  two  points  are  worth  a  little  elaboration. 
It  is  well  known  that  certain  prices  are  sensitive  and 
others  insensitive  to  the  various  market  influences. 
For  instance,  the  wholesale  price  of  silver  is  so  respon- 
sive to  every  market  wind  which  blows  that  rarely  are 
the  quotations  on  two  successive  days  alike ;  while, 
on  the  other  hand,  street  railway  fares  have  only  be- 
gun to  budge  from  the  traditional  five  cents  after 
having  stood  stock  still  through  more  than  two  dec- 
ades of  upheaval  of  prices  of  most  other  goods  and 
services.  As  our  index  number  is  designed  to  register 
promptly  the  effects  of  an  increase  or  decrease  of  money 
in  circulation,  an  index  number  made  up  of  prices, 
almost  unchangeable  like  street  railway  fares  and  the 
price  of  postage  stamps,  would  be,  to  that  extent, 
like  a  painted  clock,  a  false  and  useless  indicator. 

In  short,  the  prompter  the  indications  for  needed 
adjustments,    the    prompter    the    adjustments,    and 


150  STABILIZING   THE    DOLLAR  [App.  I 

the  history  of  prices  has  repeatedly  and  clearly 
shown  that  wholesale  prices  respond  the  most  promptly 
of  all  classes  of  commodity  prices.  They  rise  or  fall 
before  retail  prices,  just  as  retail  prices  do  before  wages, 
and  wages  before  salaries. 

Not  only  are  wholesale  prices  a  prompter  and 
better  index  of  the  purchasing  power  of  money  but,  if 
the  level  of  wholesale  prices  is  stabilized,  the  level  of 
retail  prices  will  be  stabilized  also.  It  is  true  that 
when  the  wholesale  level  changes  the  retail  level  lags 
behind.  But  the  lag  depends  on  the  change;  that  is, 
other  things  equal  the  lag  is  most,  absolutely  at  least, 
when  the  change  in  wholesale  prices  is  most  and  least 
when  that  change  is  slowest.  If  the  level  of  wholesale 
prices  did  not  change  at  all  the  level  of  retail  prices 
would  likewise  keep  fairly  stable ;  for  there  can  be  no 
lagging  behind  when  there  is  no  movement  behind 
which  to  lag.  When  a  fisherman  moves  his  pole  back 
and  forth,  the  line  and  sinker  follow,  lagging  behind. 
But  if  he  ceases  to  move  the  pole,  the  line  will  hang 
more  nearly  plumb. 

(4)  What  has  just  been  said  paves  the  way  for  the 
selection  of  the  particular  commodities  to  be  included. 
Just  as  prices  of  commodities  at  wholesale  are  more 
sensitive  or  responsive  than  those  at  retail,  so  some 
wholesale  prices  are  more  responsive  than  others. 
In  other  words,  for  one  reason  or  another,  the  prices  of 
certain  commodities,  even  at  wholesale,  are  more  or 
less  resistive  to  change,  i.e.  they  change  only  sluggishly 
and  after  the  pressure  to  change  them  has  accumu- 
lated. Steel  rails,  for  instance,  remained  $28  a  ton 
for  many  years. 

With  these  requirements  in  mind,  the  next  con- 
sideration is  that  the  list  of  commodities  be  as  general 
as  possible.  I  would  myself  prefer  a  more  general 
standard  than  food,  although  almost  any  standard 
based  on  a  number  of  commodities  would  be  superior 
to  the  gold  standard  based  on  one  alone.  If  a  very 
general  standard  were  adopted,  it  is  quite  true  that  the 


Sec.  3] 


TECHNICAL  DETAILS 


151 


"  cost  of  living  "  in  any  restricted  sense  (such  as  the 
cost  of  food  alone)  could  change  somewhat,  though  not 
greatly.  Furthermore  an  index  number  must  serve 
not  simply  the  purpose  of  stabilizing  the  value  of 
money  to  wage  earners  but  serve  the  purposes  of 
transactions  generally.  For  a  large  share  of  those 
transactions,  a  general  wholesale  index  number  is  the 
best. 

I  have  had  a  special  index  number  calculated  for  me 
through  Mr.  Bell  of  the  United  States  Bureau  of  Labor 
Statistics,  derived  from  the  same  data  and  calculated 
by  the  same  methods  as  those  used  by  the  Bureau  but 
excluding  the  articles  sluggishly  changing,  i.e.  most 
frequently  remaining  unchanged  in  successive  months. 
The  resulting  index  number  is,  therefore,  presumably 
more  promptly  responsive  to  any  influences  affecting 
it  than  any  other  index  number  of  wholesale  prices 
which  has  been  constructed.  The  list  of  commodities 
on  which  it  is  based  includes  75  commodities  and  155 
series  of  price  quotations  as  follows  : 


Farm  Products 

Milk 

Cotton 

Molasses 

Flaxseed 

Sugar 

Barley 

Tea 

Corn 

Vinegar 

Grain  ' 

Oats 

Cloths  arid  clothing 

I  Wheat 

Boots  and  shoes 

Hides 

Carpets 

Cotton  flannels 

Food 

Cotton  yarns 

Beans 

Denims 

Butter 

Drillings 

Coffee 

Ginghams 

Eggs 

T^i         1 R  ve 
Flour  ^yheat 

Leather 

Linen  shoe  thread 

Print  cloths 

I. 

Glucose 

Sheetings 

Lard 

Shirtings 

Meal,  corn 

Silk 

f  Bacon 

Tickings 

Meat  <  Beef 
Lamb 

Women's  dress  goods 

Wool 

V- 

A 

;/' 

152 


STABILIZING   THE    DOLLAR 


[App.  I 


Fuel  and  lighting 
Alcohol 
Coal 
Coke 
Petroleum 

Metals  and  metal  products 
Bar  iron 
Copper 
Lead,  pig 
Lead  pipe 
Nails 
Pig  iron 
Silver 

Q,    1    f  Billets,  Bessemer 
^^®®^   [Structural 
Tin 
Zinc 

Lumber  and  building  materials 
Brick 
Lime 


Paint 
materials 


Shingles 

Drugs  and  chemicals 

Alcohol 

Alum 

Glycerin 

Opium 

Quinine 
Miscellaneous 

Cottonseed  meal 

Cottonseed  oil 

Jute 

Paper 

Rope 

Rubber 

Soap  /i 

Starch 


Lead,    carbon- 
ate of 
Linseed  oil 
Turpentine 
Zinc,  oxide  of 


(5)  The  frequency  of  calculating  the  index  number, 
which  means  the  frequency  of  adjusting  the  dollar's 
weight,  depends  on  a  number  of  circumstances,  in- 
cluding the  time  required  to  calculate  the  index  num- 
ber and  that  required  for  the  effect  of  each  adjust- 
ment to  be  felt. 

The  time  required  for  calculation  should  be  trifling. 
Judging  from  the  expeditiousness  with  which  some 
of  the  commercial  index  numbers  are  now  calculated, 
and  with  which  our  Government  weather  maps  are 
published,  I  believe  that,  with  the  aid  of  the  tele- 
graph, an  index  number  could  easily  be  calculated 
within  two  or  three  days  after  the  date  for  which  the 
prices  are  quoted. 

How  quickly  the  index  number  responds  to  a 
change  in  the  money  supply  has  never  been  fully 
demonstrated.  Professor  J.  Shield  Nicholson,  plot- 
ting English  war  currency  and  index  numbers  of  prices 
at  quarterly  intervals,  found  that  the  behavior  of  the 
price  level  seemed  to  correspond  to  that  of  the  cur- 


Sec.  3]  TECHNICAL  DETAILS  153 

rency  in  the  previous  quarter  rather  than  to  that  in 
the  same  quarter,  thus  suggesting  a  lag  between  cause 
and  effect  of  one  quarter  of  a  year.  His  figures  did 
not  admit  of  a  closer  analysis.  A  lag  about  half  as 
great  seems  to  exist  in  the  United  States  between  the 
changes  in  the  money  in  circulation  {i.e.  in  pockets, 
tills,  and  banks  other  than  Federal  Reserve  Banks) 
and  the  index  numbers  of  Dun  or  Bradstreet  or  the 
United  States  Bureau  of  Labor  Statistics. 

The  specially  responsive  index  number  which  I  have 
had  calculated  seems  to  show  a  still  shorter  lag,  namely, 
a,bout  one  month.  Perhaps  the  most  sudden  and 
unmistakable  single  instance  of  a  right-about-face  of 
prices  succeeding  that  of  money  is  that  in  the  autumn  of 
1915.  In  August  of  that  year  the  money  in  the  United 
States  shot  up  suddenly  and  rapidly.  In  September, 
one  month  later,  the  price  level  Ukewise  shot  up 
suddenly  and  rapidly  and  has  scarcely  receded  since. 
The  lag  is  here  one  month. 

It  is  interesting  to  note  some  other  cases  sufficiently 
analogous  to  be  illuminating  on  this  point.  The 
closure  of  the  Indian  mints  in  1893  showed  the  same 
promptness  of  influence  on  the  value  of  the  rupee.^ 
The  rate  of  exchange  on  London  in  New  York  has 
often  changed  from  the  maximum  to  the  minimum 
inside  of  a  fortnight.  Again,  Canadian  and  American 
price  levels,  as  worked  out  by  the  labor  bureaus  of  the 
two  countries,  correspond  with  each  other  year  by 
year  with  extreme  precision.  Even  month  by  month, 
judging  by  a  careful  comparison  for  twenty-four 
months,  the  agreement  is  very  noticeable.  The  price 
levels  of  different  countries  tend  to  approximate  each 
other  like  two  connected  lakes,  through  the  overflow  of 
currency  from  one  to  the  other,  back  and  forth.     That 

1  See,  e.g.,  tables  of  silver  and  rupees  in  relation  to  gold  in  Finan- 
cial and  Commercial  Statistics  for  British  India,  Calcutta,  1895, 
p.  353.  After  the  closure  of  the  mints  in  June,  1893,  the  first  figures 
available,  which  were  dated  about  a  month  and  a  half  after  that 
event,  show  a  marked  appreciation  of  the  rupee. 


154  STABILIZING    THE    DOLLAR  [App.  I 

the  adjustment  should  be  so  delicate  and  prompt  as 
between  countries  whose  centers  average  hundreds  of 
miles  apart  and  whose  trade  currents  are  obstructed 
by  high  tariffs  is  not  only  surprising  but  extremely 
significant. 

If  this  estimate  of  a  month  and  a  half  be  near  the 
truth,  a  monthly  or,  at  most,  a  bi-monthly  adjustment 
of  the  index  number  would  usually  give  sufficient  time 
for  any  adjustment  to  make  itself  felt  in  the  index 
number  before  the  next  adjustment  was  made. 

Some  such  period  of  waiting  for  the  effect  of  one  ad- 
justment to  work  itself  out  before  another  adjustment 
is  made  is  advisable  so  as  to  avoid,  as  far  as  possible, 
occasional  cases  in  which  the  new  adjustment  might 
prove  to  have  been  in  the  wrong  direction  and  need  to 
be  recorrected  later. 

(6)  In  my  book,  the  Purchasing  Power  of  Money 
(Chapter  X  and  Appendix  to  Chapter  X),  I  have  dis- 
cussed at  length  the  question  of  the  best  formula  for 
calculating  an  index  number.  The  merits  of  forty- 
four  formulae  are  there  considered.  On  the  whole,  I 
favor  a  weighted  arithmetical  average  Hke  that  adopted 
by  Dr.  Meeker,  Commissioner  of  Labor  Statistics,  and 
used  in  the  index  number  of  the  Bureau  of  Labor  Sta- 
tistics. This  system  was  used  in  calculating  the  special 
index  number  of  "  responsive  "  commodities  to  which  I 
have  already  referred. 

As  this  last-named  index  number  is  the  one  I  would, 
at  present,  most  favor,  it  is  given  on  the  opposite  page 
and  the  regular  index  number  of  the  Bureau  of  Labor 
Statistics  is  given  for  comparison. 


4.    Selection  of  the  Par 

We  may  distinguish  three  classes  of  contracts,  past, 
present,  and  future,  i.e.  those  both  made  and  fulfilled  in 
the  past,  those  made  in  the  past  but  to  be  fulfilled 
in  the  future,  and  those  to  be  both  made  and  fulfilled  in 


Sec.  4] 


TECHNICAL  DETAILS 


155 


January       1913 
March   .     .     . 
May       .     .     . 
July       .     .     . 
September 
November 
January       1914 
March   .     .     . 
May       .     .     . 
July        .     .     . 
September 
November 
January       1915 
March   .     .     . 
May       .     .     . 
July       .     .     . 
September 
November 
January       1916 
March   .     .     . 
May       .     .     . 
July       .     .     . 
September 
November 
January       1917 
March   .     .     . 
May       .     .     . 
July       .     .     . 
September 
November 
January       1918 
March   .     .     . 
May       .     ,     . 
July       .     .     . 
September 
November 
January       1919 
March   .     .     . 
May       .     .     . 
July       .     .     . 
September 
November 


Index  Number 

OP  Responsive 

Commodities 

1913  =  100 

Index  Number  of 

Bureau  of  Labor 

Statistics 

1913  =  100 

101.57 

99.33 

99.65 

99.32 

98.52 

98.34 

99.28 

100.53 

102.74 

102.18 

103.51 

101.04 

100.74 

99.53 

99.18 

98.92 

97.17 

97.79 

96.47 

99.17 

102.43 

102.90 

98.24 

97.70 

101.13 

98.02 

102.57 

98.69 

103.93 

100.32 

102.11 

100.51 

99.57 

98.47 

106.26 

102.36 

114.47 

109.75 

115.96 

113.58 

119.50 

]  17.77 

119.37 

118.75 

130.48 

126.94 

149.47 

142.88 

156.09 

149.75 

163.28 

159.77 

192.52 

180.62 

199.47 

184.96 

196.46 

181.69 

197.44 

182.22 

206.14 

185.41 

207.48 

187.45 

201.71 

190.71 

209.94 

198.12 

223.21 

206.65 

217.16 

206.14 

213.02 

202.01 

198.40 

200.45 

214.19 

206.55 

229.83 

216.37 

156  STABILIZING   THE    DOLLAR  [App.  I 

the  future.  In  the  start-off,  i.e.  in  the  selection  of 
the  par  or  price  level  which  the  new  system  would 
undertake  to  maintain,  only  the  middle  of  these  three 
groups  need  be  considered. 

It  is  true  that  the  chief  purpose  of  the  new  plan  is 
to  provide  for  the  third  class,  future  contracts  ;  for  these 
include  the  numberless  contracts  of  generations  yet 
unborn.  But  for  this  purpose  any  price  level  what- 
ever would  serve  for  the  par  as  well  as  any  other,  even 
if  it  were  ten  times  as  high  or  as  low  as  the  present  price 
level. 

Nor  do  the  contracts  of  the  past  concern  us.  They 
have  been  written  off  the  books  and  are  beyond  recall 
or  correction.  Nor  can  those  who  suffered  losses  or 
made  gains  on  past  contracts  be  selected  out  and  in- 
demnified or  assessed  damages  to-day.  And,  if  these 
past  victims  could  be  found,  the  adjustments  they 
would  require  could  not  be  accomplished  by  selecting 
any  particular  price  level  such  as  that  existing  at  some 
particular  date  in  the  past.  A  reversion  to  standards 
from  which  we  have  drifted  far  will  only  make  bad 
matters  worse.  Two  wrongs  do  not  make  a  right. 
Bygones  must  be  bygones. 

To  urge  going  back  to  an  antiquated  price  level  was 
a  fatal  mistake  in  the  16  to  1  proposal  in  the  '90s  which 
aimed  to  go  back  to  the  "  dollar  of  the  daddies  "  and 
the  price  level  of  1873. 

To-day  those  who  talk  of  pre-war  prices  as  "  normal  " 
might  almost  as  well  talk  of  the  price  of  1896  as  "  nor- 
mal." They  do  not  stop  to  think  that  most  of  the 
adjustments  have  been  made  nor  of  the  injustice  which  a 
reversion  to  an  obsolete  standard  would  do  to  the  con- 
tracts of  the  present. 

The  war  debts  both  in  this  country  and  in  Europe, 
for  instance,  have  been,  for  the  most  part,  contracted 
at  high  price  levels.  If  we  should  drop  back  to  the 
1913  level  of  prices  it  would  almost  double  the  burden 
of  our  national  debt,  for  the  government  would  have 
to  repay  dollars  almost  twice  as  big  in  purchasing 


Sec.  4]  TECHNICAL  DETAILS  157 

power  as  the  average  of  those  which  it  borrowed  at 
the  five  Liberty  Loan  dates. ^ 

In  considering  Europe's  burden  of  debt  we  must  re- 
member the  unacknowledged  premium  on  gold  and 
the  grave  circumstance,  of  similar  significance,  that 
the  price  upheaval  in  Europe  was  even  more  serious,  far 
more  serious,  than  with  us. 

In  the  absence  of  any  more  exact  estimate  let  us  as- 
sume that  the  average  price  level  in  western  Europe 
is  threefold  that  of  1913  while  ours  is  only  two- 
fold. 

Conformable  to  this  situation  we  may  further  assume 
that  to  resume  specie  payments  and  get  back  to  and 
maintain  the  old  pars  of  exchange,  European  price 
levels  must  drop  relatively  to  ours  by  about  one  third ; 
for,  if  our  present  price  level  be  maintained,  Europe's 
would  have  to  fall  in  the  ratio  of  3  to  2. 

This  means  that  the  purchasing  power  of  her  money 
must  appreciate  in  the  ratio  of  2  to  3.  Such  an  appre- 
ciation would  alone  add  50%  to  Europe's  burden  of 
debt  as  compared  with  what  it  is  at  present  prices. 

Now,  if  we  in  America  insist  on  reverting  to  our 
pre-war  level  —  if,  that  is,  we  double  the  present  pur- 
chasing power  of  our  dollar,  Europe's  price  level,  in 
order  to  get  back  to  the  normal  relation  to  ours,  must 
be  cut  in  three  and  her  war  debt  virtually  tripled. 
Even  without  war  debts  Europe  would  be  ruined  eco- 
nomically if  her  money  units  were  thus  tripled  in  pur- 
chasing power  within  a  generation.  Even  an  enhance- 
ment of  50%  would  be  almost  unbearable  and  would 
probably  fan  social  discontent  into  revolution.  To  see 
that  this  is  a  grim  fact  we  need  only  to  recall  how  be- 

^  The  average  index  number  at  the  five  dates  was  195  (on  the 
basis  of  100  for  1913),  calculated  as  follows: 

1st   Liberty  Loan  June  1917  index  number  184X2.0  billion  =  368 

2d     Liberty  Loan  Nov.  1917  index  number  182X3.6  billion  =   655 

3d     Liberty  Loan  May  1918  index  number  191X4.1  billion  =   783 

4th  Liberty  Loan  Oct.   1918  index  number  204X7.0  billion  =  1428 

5th  Liberty  Loan  May  1919  index  number  200X5.3  billion  =  1060 

weighted  average  index  number  195  X  22  billion  =4294 


158  STABILIZING   THE    DOLLAR  [App,  I 

tween  1873  and  1896  business  men  and  farmers  in  Amer- 
ica struggled  to  swim  against  the  ebbing  tide  of  prices. 
Yet  our  burden  of  debt  was  negligible  compared 
with  Europe's  to-day,  we  were  not  as  economically  ex- 
hausted as  Europe  is,  and  the  fall  of  prices  was  not  so 
great  as  that  we  are  assuming. 

Under  these  circumstances  we  may  well  ask :  Is  it 
reasonable  to  expect  Europe  to  drop  her  price  level  back 
to  the  old  relation  to  ours  or  should  it  not  be  fixed  at 
some  intermediate  level? 

If  the  latter  course  is  to  be  adopted  so  that  the  old 
relations  between  the  various  national  price  levels  are 
not  to  be  resumed  and  the  old  pars  of  exchange  not  to 
be  reestablished,  the  stabilization  plan  as  proposed  in 
this  book  would  afford  the  appropriate  method  for 
maintaining  a  new  set  of  levels.  For  we  can,  by  reduc- 
ing the  weight  of  European  gold  coins  relatively  to 
ours,  enable  each  European  nation  to  adopt  its  own 
price  level  at  any  desired  point.  If,  on  the  other  hand, 
we  rehabilitate  the  old  units,  European  price  levels 
must  go  through  a  painful  fall  relatively  to  ours. 

As  to  individual  debts,  we  long  ago  abandoned,  as 
impractical,  the  theory  that  a  bankrupt  must  pay  the 
uttermost  farthing  or  go  to  prison.  If  there  ever  was  a 
time  when  the  modern  theory  of  treating  bankrupts 
should  be  extended  to  nations  it  is  now.  In  fact  we 
have  already  applied  it  to  fixing  the  indemnity  of  Ger- 
many according  to  her  ability  to  pay  rather  than  ac- 
cording to  the  damage  she  did. 

Similar  considerations  apply  to  the  reconstruction 
loans  we  are  making  to  Europe.  If  after  loaning,  in  the 
near  future,  billions  of  dollars  to  Europe  we  double  the 
purchasing  power  of  the  dollar,  we  are  not  only  put- 
ting ourselves  in  the  position  of  an  unjust  (and  much  to 
be  hated)  Shylock  but  the  pound  of  flesh  we  would  thus 
exact  of  Europe  would  drain  her  life  blood  and  weaken 
her  usefulness  to  us  as  a  customer.  The  sound  policy, 
which  we  are  now  adopting,  of  giving  Europe  long  and 
easy  credits  should  be  carried  out  in  fact  as  well  as  in 


Sec.  41  TECHNICAL  DETAILS  159 

name  and  this  implies  that  we  should  not  permit  any- 
undue  appreciation  of  our  dollar. 

For  various  reasons,  therefore,  in  starting  the  new 
and  permanent  level  of  prices,  we  cannot,  very  well,  ad- 
vocate any  drastic  departure  from  the  level  at  which  we 
happen  to  be  when  the  start  is  made.  In  short,  we 
ought  not  to  start  with  a  serious  jar. 

This  does  not  mean  that  we  must  adopt  the  exact 
level  of  the  moment. 

We  must  take  care  to  do  justice  as  between  the  then 
existing  debtors  and  creditors.  To  these  particular 
debtors  and  creditors  this  question  of  the  start-off  is 
vital. 

We  cannot  now  say,  of  course,  what  the  price  level 
will  be  when  the  new  system  shall  begin.  All  that  can 
now  be  done  toward  deciding  what  the  start-off  should 
then  be,  i.e.  what  par  or  particular  price  level  is  there- 
after to  be  maintained,  is  to  point  out  the  principles 
which  should  guide  us. 

If  the  time  of  adoption  of  the  plan  should  happen 
to  come  after  a  long  steep  rise  of  prices,  such  as  in  1919, 
1873,  1865,  or  1814,  it  is  clear  that  the  price  level  then 
existing  would  be  too  high  to  afford  a  just  and  proper 
starting  point  and  that  a  somewhat  lower  level  ought 
to  be  selected  to  which  we  should  deliberately  descend. 
Otherwise  most  outstanding  debts  would  have  to  be 
paid  in  terms  of  a  dollar  of  less  value  than  the  dollar 
contemplated  when  the  debts  were  contracted,  before 
prices  were  so  high. 

On  the  other  hand,  if  the  time  of  adoption  of  the 
plan  should  happen  to  come  after  a  long  steep  fall  of 
prices,  such  as  in  1896,  1849,  or  1821,  the  price  level 
then  existing  would  be  too  low  to  afford  a  just  and 
proper  starting  point  and  a  somewhat  higher  level  ought 
to  be  selected  to  which  we  should  deliberately  ascend. 
Otherwise  most  outstanding  debts  would  have  to  be 
paid  in  terms  of  a  dollar  of  greater  value  than  that 
contemplated  when  the  debts  were  contracted,  before 
prices  were  so  low. 


160  STABILIZING   THE    DOLLAR  [App.  I 

But  in  such  cases  of  a  rapidly  changing  price  level, 
with  existing  contracts  originating  at  many  different 
previous  levels,  it  is  impossible  to  select  any  one  price 
level  well  adapted  to  them  all.  If  we  are  to  apply  a 
single  correction  to  them  all,  it  must  be  an  average. 
We  must  cut  our  Gordian  knots  as  we  did  when  we 
resumed  specie  payments  after  the  Civil  War  and  as 
we  always  have  to  do  in  readjusting  monetary  stand- 
ards. To  strike  such  an  average,  the  price  level 
selected  should,  I  believe,  extend  back  of  the  moment 
when  the  system  starts  to  the  center  of  gravity,  as  it 
were,  of  the  outstanding  contracts  and  understandings 
now  in  existence  which  would  be  affected  by  the  new  law. 

We  can  strike  this  proposed  rough  average  of  justice 
by  making  a  calculation  as  to  the  past  duration  of  exist- 
ing contracts  of  different  kinds.  The  contracts  to  pay 
money  are  the  important  factors  to  be  considered.  I 
have  made  a  very  rough  estimate,  largely  a  guess,  of  the 
average  duration  of  the  existing  indebtedness  which 
would  be  affected,  —  railroad  bonds,  mortgages,  bank 
loans,  and  other  obligations,  —  which  seems  to  indi- 
cate that  it  is  one  year,  or  in  that  neighborhood. 

When  the  proper  time  comes,  a  judicial  commission 
to  make  a  special  intensive  expert  investigation  of  out- 
standing contracts  might  be  created  and  the  start-off 
then  fixed  in  the  light  of  the  facts  found,  and  of  common 
sense. 

If  the  average  thus  selected  should  effect  substantial 
justice  —  which  implies  that  this  recent  average  price 
level  is  not  far  from  the  price  level  at  the  moment  the 
system  is  launched,  nor  far  from  the  price  level  for  any 
other  moment  during  the  past  year  at  least,  —  nothing 
more  need  be  done  to  secure  justice  on  existing  con- 
tracts. 

But  if  the  case  is  otherwise  —  if,  for  instance,  the 
average  price  level  as  calculated  should  differ  say  by 
more  than  5%  or  10%  from  that  of  any  date  within  a 
year  previous  to  the  launching  of  the  new  plan,  we 
might  perhaps  better  give  up  the  idea  of  making  a  single 


Sec.  5]  TECHNICAL  DETAILS  161 

average  correction  to  apply  to  outstanding  contracts. 
Instead,  special  legislation  "  scaling "  or  adjusting 
debts  might  be  adopted,  as  was  sometimes  done  in  the 
case  of  Colonial  paper  money.  If  this  solution  were 
chosen  the  price  level  for  the  start-off  need  not  be 
changed  at  all  from  the  level  then  existing. 

Under  any  ordinary  circumstances  the  price  level 
does  not  vary  more  than  5%  in  a  year.  Probably  by 
the  time  the  plan  could  go  into  force  the  present,  or 
recent,  troubled  course  of  prices  may  be  sufficiently 
tranquilized  as  not  to  require  any  special  legislation 
for  scaling  debts  nor  to  afford  much  discrepancy  be- 
tween the  then  existing  price  level  and  the  average  price 
level  for  a  preceding  period  of  several  months  at  least. 

Such  a  debt-scahng  law  is,  of  course,  not  involved 
in  the  proposal  to  stabihze  the  dollar.  In  fact,  if  debt- 
scaling  is  really  needed  after  stabilization  it  is  far  more 
needed  without  it  and  not  once  only  but  at  many  times. 

But  once  the  Gordian  knot  is  cut  and  the  new  price 
level  is  steadily  maintained,  all  elements  still  unadjusted 
would  gradually  become  adjusted  —  wages,  salaries, 
rents,  railway  rates,  etc.  In  the  long  run  it  will  be 
better  to  adjust  these  laggards  to  the  price  level  than 
to  adjust  the  price  level  to  them.  Even  labor  discon- 
tent would,  I  believe,  be  more  successfully  combated 
to-day  by  a  rise  of  wages  without  a  rise  of  the  cost  of 
living  than  by  the  reverse  adjustment. 

5.  What  Shall  Be  Done  with  Existing  Gold  Coins 

The  question  is  sometimes  asked :  How  are  existing 
gold  coins  to  be  retired,  as  they  are  assumed  to  be  in 
Chapter  IV  ?  The  answer  is :  by  putting  a  premium 
on  the  retirement  of  the  coins  or  a  penalty  on  their  re- 
tention, or  both.  To  retire  the  Philippine  peso  (and 
replace  it  by  another  of  less  weight)  a  slight  premium 
was  offered  to  holders  of  the  old  coin  up  to  a  specified 
date,  after  which  the  coin  was  not  to  be  received  by 
the  government  except  at  a  discount. 

M 


162  STABILIZING   THE    DOLLAR  [App.  I 

It  may  be  worth  mentioning  that  neither  the  retire- 
ment of  existing  gold  coins  nor  the  cessation  of  their 
coinage  in  future  need  be  insisted  upon.  By  a  sUght 
modification  of  the  plan,  we  could  permit  gold  coins 
and  coinage  to  continue.  In  fact  in  the  formulations 
of  the  plan  which  I  usually  made  before  the  war,  gold 
coins  and  coinage  were  retained.  I  then  thought 
that  the  custom  of  handling  gold  coins  was  so  firmly 
intrenched  in  some  places,  notably  Great  Britain,  that 
the  plan  would  be  more  welcome  if  gold  coins  were 
retained  even  if  only  as  token  coins. 

Since  then,  the  war  itself  has  brought  about  the  very 
retirement  which  we  are  discussing  and  has  conquered 
most  of  the  popular  prejudice  which  stood  in  its  way ; 
and,  from  motives  of  economy,  all  nations,  including 
Great  Britain,  will  probably  now  prefer  not  to  return 
to  the  general  use  of  gold  coins.  It  has  therefore  seemed 
best  not  to  cumber  the  present  text  with  the  description  ^ 
of  what  now  proves,  apparently,  to  be  an  unnecessary 
complication. 

There  is,  however,  a  third  plan  possible,  intermedi- 
ate between  the  plan  of  the  present  text  (in  which 
gold  coins  are  retired  and  their  coinage  ceases)  and 
the  plan  formerly  put  forward  (in  which  both  coins  and 
coinage  are  retained). 

This  intermediate  plan  is  to  authorize  the  retention 
of  the  existing  gold  coins  but  to  stop  the  coinage  of  new 
coins  —  though  retaining,  of  course,  the  unrestricted 
deposit  of  gold  bullion  in  return  for  the  issue  of  gold 
dollar  certificates. 

This  third  plan  would  seem  to  me  to  be  preferable 
in  practice  to  either  of  the  other  two  as  it  would  dispense 
with  the  need  of  recalling  the  few  gold  coins  now  out- 
side of  government  vaults  and  would  not  involve  any 

1  This  wiU  be  found  in  the  Quarterly  Joxirnal  of  Economics, 
February,  1913,  pp.  213-235.  It  is  interesting  to  observe  that  Simon 
Newcomb,  one  of  the  earliest  writers  who  anticipated  me  in  formu- 
lating the  plan,  also  suggested  this  feature  by  which  gold  coin  could 
be  retained.     See  North  American  Review,  September,  1879. 


Sec.  6]  TECHNICAL  DETAILS  163 

special  difficulties  no  matter  which  way  the  value  of 
gold  should  change. 

Thus  if,  at  any  time,  the  gold  coins  were  worth  more 
than  their  contained  bullion,  they  would  continue  to 
circulate  as  token  coins,  each  eagle  of  258  grains  en- 
titling the  holder  on  demand  to  a  ten-dollar  certificate 
or  ten  dollars  of  gold  bullion  (of  more  than  25.8  grains 
per  dollar). 

On  the  other  hand  if,  at  any  time,  they  were  worth 
less  as  money  than  the  contained  bullion,  they  would 
be  melted  by  the  owners,  disappear  as  coin,  and  be  de- 
posited with  the  government  as  bullion  in  return  for 
certificates.  Any  gold  coin  in  the  government  vaults 
would  likewise  be  melted. 

But  the  process  would  stop  there,  limited  by  the 
amount  of  gold  coin  available.  There  would  be  no 
"  endless  chain  "  of  redemption  of  certificates  at  one 
rate  and  recoinage  at  another  such  as  would  (as  ex- 
plained in  my  article  in  the  Quarterly  Journal  of  Eco- 
nomics, February,  1913)  have  to  be  guarded  against  in 
the  second  of  the  three  plans. 

In  spite  of  the  slight  practical  superiority  of  this 
third  method  of  handling  existing  coin,  I  have  preferred 
in  Chapter  IV  to  present  the  first  method  as  simpler 
to  understand,  and  less  confusing  to  the  reader.  With 
so  few  coins  as  are  now  in  circulation  it  is  really  almost 
immaterial  which  of  these  two  methods  is  adopted. 

6.  What  Shall  Be  Done  Concerning  the  "  Gold 
Clause  "  in  Existing  Contracts 

One  of  the  questions  which  will  have  to  be  faced 
when  stabilization  is  adopted  is :  What  should  be 
done  with  the  numerous  bonds  and  other  contracts 
containing  a  "  gold  clause  "  to  the  effect  that  the  con- 
tract calls  for  payment  in  "  gold  coin  of  the  present 
weight  and  fineness"? 

This  clause  had  its  origin  in  the  nineties  when  the 
"  free  coinage  of  silver  at  16  to  1  "  was  agitated.     It 


164  STABILIZING   THE   DOLLAR  [App.  I 

was  intended  to  safeguard  the  creditor  against  pay- 
ment in  silver  dollars  which,  it  was  justly  feared,  would 
be  greatly  depreciated  in  purchasing  power,  if  the  16 
to  1  proposal  were  adopted. 

The  statute  enacting  stabilization  ought  to  include 
a  specific  settlement  of  this  gold-clause  question. 

Otherwise,  it  would  be  left  for  the  courts  to  interpret, 
and  long  and  costly  litigations  would  be  sure  to  result. 
Pending  a  decision  by  the  Supreme  Court  the  status 
of  all  gold-clause  contracts  would  be  uncertain.  In 
attempting  legally  to  resolve  this  uncertainty  there 
would  be  two  widely  different  views  possible.  It  might 
plausibly  be  argued  that  in  the  gold  clause,  ''  coin  " 
was  specified  only  for  its  convenience  to  handle,  as 
compared  with  bullion.  According  to  this  interpreta- 
tion gold-clause  contracts  ought,  under  stabilization, 
to  be  reckoned  in  terms  of  gold  bullion,  and  when 
the  gold  dollar  became  greater  or  less  than  23.22 
grains  of  pure  gold,  contracts  containing  the  gold 
clause  would  still  have  to  be  measured  in  dollars  of 
bullion  of  23.22  grains  each. 

But,  on  the  other  hand,  it  might  with  almost  equal 
plausibility  be  argued  that  the  word  "  coin  "  must  be 
taken  literally  and  that  the  creditor  had  the  right  to 
require  the  delivery  of  such  coins  or  their  equivalent. 
If  such  were  the  interpretation  and  (as  supposed  in 
Appendix  I,  §  5)  gold  coin  were  not  retired  but  con- 
tinued in  existence  as  token  coins,  i.e.  at  a  value  above 
that  of  the  contained  bullion,  the  technical  fulfillment 
of  the  gold  clause  by  the  payment  of  these  "  over- 
valued "  coins,  or  their  equivalent,  would  coincide 
with  the  use  of  stabilized  dollars  to  which  they  would 
be  equivalent  (as  explained  in  Appendix  I,  §  5). 

This  interpretation,  insisting  on  "  coins,"  would, 
however,  encounter  difficulties  if  gold  coins  were 
abolished  entirely  (as  suggested  in  the  text)  or  if,  though 
not  recalled  by  law,  they  were  all  melted  into  bullion 
because  the  bullion  in  them  had  come  to  be  worth  more 
than  their  face  value  (as  supposed  in  Appendix  I,  §  5). 


Sec.  6]  TECHNICAL  DETAILS  165 

All  these  technical  controversies  would  be  avoided  if, 
in  the  statute  establishing  a  stable  dollar,  the  gold 
clause  in  existing  contracts  were  abrogated  entirely  and 
unambiguous  requirements  were  substituted  to  meet  the 
new  situation  and  carry  out  the  real  object  of  the  gold 
clause. 

It  should  be  pointed  out  that  abrogation,  though 
beyond  the  power  of  our  individual  states  under  Article 
I  of  our  Federal  Constitution,  is  apparently  quite 
within  the  power  of  the  Federal  Congress.' 

Having  thus  abrogated  the  gold  clause  in  all  con- 
tracts outstanding  at  the  date  of  the  stabilization  law, 
Congress  could  replace  that  clause  by  whatever  pro- 
vision it  chose. 

The  provision  which,  on  the  whole,  seems  to  me  the 
fairest  from  various  standpoints  is  to  make  all  such 
contracts  exactly  like  all  others,  i.e.  payable  in  stabi- 
lized dollars. 

That  such  a  requirement  would,  even  technically, 
reinstate  the  gold  clause  —  under  at  least  certain  cir- 
cumstances (such  as  the  retention  of  gold  coin  as  "  token 
coin  ")  — might  well  be  argued,  as  has  just  been  shown. 

But  the  only  justification  worth  while  for  such  a  law 
is  that  it  would  do  justice  and  by  doing  justice  we  would, 
in  a  broad  sense,  be  carrying  out  the  intent  of  the  gold 
clause.  This  clause  was  never  intended  to  introduce 
a  hazard  into  contracts  but  to  take  one  away,  not  to 
enable  one  of  the  contracting  parties  to  mulct  the  other 

'  This  power  is,  I  understand,  well  recognized  in  a  general  way 
although  no  case  precisely  like  that  here  considered  seems  to  be  on 
record.  The  nearest  cases  were,  apparently,  the  famous  legal  tender 
cases  in  reference  to  which  the  Supreme  Court  certified  the  right  of 
Congress  to  make  United  States  notes  legal  tender  for  the  payment 
of  debts  contracted  prior  to  the  legislation.  The  legal  tender  act,  it 
is  true,  related  only  to  contracts  to  pay  money  generally  and  not  to 
contracts  to  pay  a  specific  kind  of  money  such  as  "gold  coin  of  the 
present  weight  and  fineness."  But  Justice  Bradley  ( 12  Wall.  457, 
566,  567)  said :  "  I  do  not  understand  the  majority  of  the  Court 
to  decide  that  an  Act  so  drawn  as  to  embrace  in  terms  contracts 
payable  in  specie  would  not  be  constitutional.  Such  a  decision 
would  completely  nullify  the  power  claimed  for  the  Govern- 
ment." 


166  STABILIZING   THE   DOLLAR  [App.  I 

but  to  prevent  it.  In  a  broad  sense,  therefore,  the  sub- 
stitution of  stable  dollars  for  "  gold  coin  of  the  present 
weight  and  fineness  "  would  carry  out  the  spirit  if  not 
the  letter  of  that  clause  under  the  new  conditions. 
Stabilization  would  supersede  the  gold  clause  as  a  more 
perfect  way  of  attaining  the  same  general  object  — 
contractual  justice. 

And  not  only  would  complaint  over  such  substitution 
be  unjustified  but  it  would  rarely,  if  ever,  be  made  or 
thought  of  for  the  very  simple  reason  that  we  would 
go  on  in  our  habit  of  thinking  in  terms  of  dollars. 

Under  stabiUzation  the  debtor  for  $10,000  would 
still  expect  to  draw  his  check  for  exactly  $10,000 
and  the  creditor  would  expect  to  receive  exactly 
that  sum.  In  99  out  of  100  cases  the  question  of 
whether,  under  the  gold  clause,  the  check  ought  per- 
haps to  be  drawn  for  a  larger  or  smaller  sum  than 
the  face  of  the  obligation  would  never  enter  the  head 
of  either  party. 

On  the  other  hand,  if  exceptional  treatment  were 
given  to  contracts  having  the  gold  clause,  so  that  these 
were  not  to  be  fulfilled  in  stabilized  dollars,  there  would 
be  great  complaint.  For  then  the  only  way  to  discharge 
a  gold-clause  contract  to  pay  $10,000  would  be  to  pay 
something  more  or  less  than  $10,000  according  as  the 
price  of  gold  had  risen  or  fallen.  If,  because  of  a  raking 
up  of  the  gold  clause,  a  debtor  owing  $10,000  is  informed 
by  his  creditor  that  he  has  to  pay,  say,  $10,842.79  the 
$842.79  will  obtrude  itself  like  a  sore  thumb  and  seem 
to  the  debtor,  as  it  really  would  be,  the  exact  measure 
of  an  injustice. 

On  the  other  hand,  if  the  discrepancy  between  the 
stabilized  dollar  and  "  gold  coin  of  the  present  weight 
and  fineness  "  were  in  the  other  direction  and  a  debtor 
tendered  what  he  owed  under  a  $10,000  debt  subject 
to  the  gold  clause  by  offering  to  pay  $9,500  (which  we 
shall  suppose  is  the  equivalent  of  ten  thousand  dollars 
of  23.22  grains  of  pure  gold  each)  the  creditor  would 
always  feel,  and  justly,  that  he  had  been  robbed  of  $500 


Sec.  6]  TECHNICAL  DETAILS  167 

by  a  wrong  interpretation  of  a  clause  originally  inserted 
to  safeguard  him  against  just  such  injustice. 

Moreover,  if  the  gold  clause  were  not  thus  assimi- 
lated to  the  new  dollar  great  confusion  would  be  in- 
troduced from  the  double  reckoning.  Probably  the 
most  extreme  instance  would  be  that  of  the  insurance 
companies,  the  assets  of  which  are  invested  largely  in 
gold-clause  bonds  but  the  liabilities  of  which  to  their 
policy  holders  are  payable  in  "  lawful  money."  If  the 
dollars  used  for  measuring  both  assets  and  liabilities 
are  to  be  made  different,  these  companies  might  be- 
come either  bankrupt  or  greatly  enriched  as  a  conse- 
quence. 

It  seems  clear,  therefore,  that  the  solution  here  offered 
of  the  gold-clause  problem  is  the  justest,  simplest,  and 
most  smoothly  working  of  the  various  solutions  which 
might  be  considered. 

If,  however,  Congress  should  conclude  that  it  was 
necessary  to  provide  further  against  the  possibility  of 
any  complaint,  it  could  leave  the  contracting  parties 
some  choice  in  the  matter.  That  is,  the  Act  to  stabi- 
lize the  dollar  could  serve  notice  that  stabilized  dollars 
would  be  understood  unless  objections  were  raised  by 
either  contracting  party  between  the  date  of  the  Act 
and  the  date  on  which  the  new  system  was  to  be  put 
into  effect.  For  cases  where  such  objection  was  actu- 
ally raised,  the  law  could  provide  that  the  two  parties 
to  the  contract  might  come  to  an  agreement  and  fur- 
ther that,  in  case  of  their  failure  to  do  so,  the  creditor 
should  have  the  right  to  choose,  in  advance,  between  the 
stabilized  dollar  and  a  dollar  of  bulHon  of  the  present 
weight  and  fineness.  When  this  choice  was  made,  it 
could  not,  of  course,  be  altered  afterward,  even  if,  as 
would  be  quite  possible,  the  creditor  should  find  that 
he  had  chosen  against  his  own  interests. 

The  result  would  undoubtedly  be  that  even  the  few 
contracting  parties  who  would  raise  the  question  of  the 
gold  clause  would  find  an  easy  way  to  settle  it,  while 
none  of  those  who  failed  to  raise  the  question  could 


168  STABILIZING   THE   DOLLAR  [App.  I 

ever  maintain  that  they  had  not  been  given  a  fair 
chance,  for  they  had  at  one  time  been  virtually  told 
to  speak  then  or  else  forever  after  hold  their  peace. 

7.  Bank  Credit  and  the  Plan 

A.  Misconceptions.  It  should  be  pointed  out  that 
the  plan  proposed  in  this  book,  by  maintaining  the 
purchasing  power  of  the  gold  dollar,  necessarily  main- 
tains also  the  purchasing  power  of  all  other  dollars,  so 
long  as  these  other  dollars  are  kept  interconvertible 
with  gold  dollars. 

This  implies  that  due  provision  for  redemption,  in 
gold,  of  paper  money  and  bank  deposits  must  be  main- 
tained by  suitable  legislation  or  regulations,  such  as 
are  usually  afforded  by  sound  currency  and  banking 
laws  and  practices.  That  is,  the  stabilization  plan  pre- 
supposes sound  banking  though  not  any  special  form  of 
sound  banking. 

In  this  connection  some  curious  misconceptions  have 
arisen,  such  as  the  notion  that  to  stabilize  the  gold  dollar 
can  apply  only  to  gold  and  not  to  credit  or  can  only 
correct  such  instability  as  has  its  origin  in  gold  and  not 
such  as  has  its  origin  in  credit,  in  commodities,  or  else- 
where. These  views  overlook  the  fact  that  all  dollars 
are  interconvertible. 

One  friend  of  the  plan  fell  into  an  opposite  error  in 
that,  instead  of  finding  any  limitations  on  the  power 
of  the  plan  to  effect  stability,  he  assumed  that  it  would 
dispense  with  the  need  of  any  restrictions  whatever  on 
the  inflation  of  paper  or  credit !  We  could,  he  thought, 
"  run  the  printing  press  "  ad  libitum  and,  for  instance, 
pay  the  cost  of  the  Great  War  thereby,  without  suffer- 
ing the  penalty  of  high  prices ! 

Of  course  the  process  of  stabilizing  the  dollar  has 
no  such  magic  power  to  take  the  place  of  sound  cur- 
rency and  banking.  If,  with  one  hand,  we  were  to 
stabilize  the  gold  dollar  and,  with  the  other,  we  were 
to  inflate  paper  or  deposits,  we  should  be  pulling  both 


Sec.  7,  B]  TECHNICAL  DETAILS  169 

ways  at  once  and  if  the  conflict  were  continued  long 
enough  inflation  would,  in  the  end,  exhaust  and  defeat 
stabilization.  The  inflation,  tending  to  raise  prices, 
would  necessitate  an  increase  in  the  dollar's  weight 
which  would  involve  a  proportionate  decrease  in  the 
number  of  dollars  in  the  reserve.  The  reserve  would 
also  be  depleted  by  the  increased  tendency  to  redeem 
certificates  in  the  heavier  dollars,  the  certificates  dis- 
placing the  gold  and  driving  it  abroad. '^ 

All  would  go  well  and  the  price  level  and  purchasing 
power  of  the  dollar  be  approximately  maintained,  so 
long  as  redemption  could  also  be  maintained.  But 
if  the  inflation  were  persisted  in  far  enough,  the  con- 
stant increase  in  the  credit  superstructure  and  decrease 
in  the  gold  base  (i.e.  in  the  number  of  dollars  in  it) 
would  ultimately  break  down  redemption.  Thereafter 
the  gold  dollar  would  cease  to  exist  as  a  factor  in  our 
monetary  system,  leaving  only  irredeemable  paper  and 
deposit  dollars  in  actual  use.  After  this  breakdown 
the  paper  and  deposit  dollars  would  depreciate. 

B.  The  Effect  of  War  on  Bank  Credit.  During  the 
Great  War,  as  in  other  great  crises,  the  exigencies  of 
Government  finance  caused,  in  almost  all  countries,  an 
expansion  of  paper  and  credit  almost  regardless  of  the 
effect  on  prices  or  on  redemption.  At  such  times  the 
pressure  for  inflation  is  almost,  or  quite,  irresistible.  The 
paramount  object  is  then  financing  the  war  rather  than 

1  This  assumes  the  existence  of  the  "indefinite"  reserve  system 
(see  Appendix  I,  §  1,  G). 

If  the  "definite"  reserve  system  (see  Appendix  I,  §  1,  5  and  F) 
is  maintained,  inflation  of  certificates  would  be  impossible ;  for  as 
fast  as  the  issue  of  certificates  went  on,  their  redundancy  and  back- 
flow  would  require  their  cancellation.  Other  forms  of  inflation,  such 
as  deposit  inflation,  would,  however,  still  be  possible.  These  would 
have  the  effect  (through  raising  prices  and  weighting  the  doUar)  of 
decreasing  both  the  gold  reserve  and  the  certificates  in  unison.  The 
result  would  be  not  to  weaken  the  Government  gold  reserve  as 
against  certificates,  but  to  weaken  all  other,  e.g.  bank,  reserves  held 
in  these  certificates.  The  ultimate  disaster,  which  would  still  over- 
take continued  inflation,  would  then  consist  in  a  cleavage,  not 
between  gold  and  certificates,  but  between  these  two  and  the  other 
forms  of  money  and  credit  based  on  them. 


170  STABILIZING  THE   DOLLAR  [App.  I 

maintaining  monetary  standards,  and  any  stabilization 
plan  might  have  to  be  temporarily  suspended  as  one 
of  the  emergency  measures  of  war,  just  as  the  English 
Bank  Act  is  temporarily  suspended  during  a  crisis. 
Stabilization  could  be  maintained  provided  the  war 
could  be  financed  without  recourse  to  inflation,  i.e. 
could  be  paid  for  out  of  taxes  and  loans  from  savings. 
Inflation,  which  is  really  a  forced  loan,  puts  the  other- 
wise unpaid  cost  of  the  war  on  the  shoulders  of 
those  of  "  fixed  "  incomes,  in  the  form  of  a  high  cost 
of  living. 

In  the  future,  we  have  reason  to  believe,  no  such 
world  crises  are  in  store.  But  should  they  come,  and 
stabiHzation  were  suspended,  we  would,  of  course,  be 
no  worse  off  than  if  there  had  been  no  stabilization. 
(See  also  Appendix  II,  §  2,  D.) 

C.  Maintenance  of  Redemption.  Thus  stabiliza- 
tion, to  be  successful,  implies  the  maintenance  of  re- 
demption. The  typical  or  ideal,  though  by  no  means 
the  only  efficient,  type  of  a  redemption-law  is  one  which 
keeps  deposits  and  paper  money  more  or  less  pro- 
portional to  bank  reserves  (of  gold  bullion  dollar  cer- 
tificates) together  with  a  Government  reserve  law  (as 
described  in  §  1)  which  keeps  the  volume  of  gold  buUion 
dollar  certificates  proportional  to  the  volume  of  gold 
dollars  in  the  Government  reserve.  Under  such  con- 
ditions all  parts  of  the  circulating  medium  tend  to 
expand  or  contract  in  unison  and  a  change  in  weight 
of  the  basic  gold  dollar  carries  with  it  a  control  of  the 
whole  mechanism  of  exchange,  cash,  and  credit. 

Bank  credit,  paper,  and  the  gold  reserve  (in  dollars) 
would  then  expand  or  contract  as  needed  (by  the  require- 
ments of  trade,  etc.)  to  keep  the  price  level  constant. 

D.  The  Role  of  Bank  Discount.  It  would  be  going 
somewhat  outside  the  scope  of  stabilization  plans  to 
discuss,  in  detail,  the  banking  procedure  for  keeping 
the  credit  superstructure  more  or  less  proportional  to 
the  redemption  base  of  gold  or  gold  certificates. 

Suffice  it,  in  this  connection,  to  call  attention  to  one 


Sec.  7,  D]  TECHNICAL  DETAILS  171 

factor  in  the  case,  the  importance  of  which  is  seldom 
reaUzed  —  the  rate  of  bank  discount. 

Under  almost  any  sensible  banking  system  the  rate 
of  discount  is  one  of  the  regulators  of  the  volume  of 
credit  relatively  to  reserve.  If  there  is  undue  expan- 
sion of  credit  relatively  to  the  reserve,  the  rate  of  dis- 
count is  raised  to  curb  it.  If,  on  the  other  hand,  there 
is  a  plethora  of  reserve,  the  rate  of  discount  is  lowered 
to  stimulate  an  increase  of  credit.  As  the  expansion 
and  contraction  of  credit  are  directly  related  to  the  price 
level,  the  rate  of  bank  discount  is  thus  concerned  very 
vitally  with  the  price  level. 

The  greatest  of  banks,  the  Bank  of  England,  is  a 
model  in  this  respect.  It  alternately  defends  and 
releases  its  gold  reserve,  which  is  the  basic  gold 
reserve  of  England,  by  raising  and  lowering  the  bank 
rate. 

The  report,  after  the  Armistice,  of  the  Lord  CunUffe 
Committee  on  Currency,  Banking  and  Foreign  Exchange 
shows  clearly  how  the  bank  rate  keeps  the  English  price 
level  in  tune  with  world  price  levels.  Speaking  of  this 
long-established  system  the  report  says : 

"When,  apart  from  a  foreign  drain  of  gold,  credit  at  home 
threatened  to  become  unduly  expanded,  the  old  currency  system 
tended  to  restrain  the  expansion  and  to  prevent  the  consequent 
rise  in  domestic  prices  which  ultimately  causes  such  a  drain.  The 
expansion  of  credit,  by  forcing  up  prices,  involves  an  increased 
demand  for  legal  tender  currency  both  from  the  banks  in  order 
to  maintain  their  normal  proportion  of  cash  to  liabilities  and  from 
the  general  public  for  the  payment  of  wages  and  for  retail  transac- 
tions. In  this  case  also  the  demand  for  such  currency  fell  upon  the 
reserve  of  the  Bank  of  England,  and  the  bank  was  thereupon 
obliged  to  raise  its  rate  of  discount  in  order  to  prevent  the  fall  in 
the  proportion  of  that  reserve  to  its  liabilities.  The  same  chain 
of  consequences  as  we  have  just  described  followed  and  speculative 
trade  activity  was  similarly  restrained.  There  was,  therefore, 
an  automatic  machinery  by  which  the  volume  of  purchasing  power 
in  this  country  was  continuously  adjusted  to  world  prices  of  com- 
modities in  general.  Domestic  prices  were  automatically  regulated 
so  as  to  prevent  excessive  import."  ^ 

^Federal  Reserve  Bulletin,  December,  1918,  p.  1178. 


172  STABILIZING    THE    DOLLAR  [Apr  I 

Professor  Knut  Wicksell  of  Sweden  has,  for  many 
years,  advocated  a  more  extensive  use  of  this  regula- 
tive function  of  the  rate  of  bank  discount  as  a  means 
of  preventing  cycles  of  credit  and  prices.  Mr.  Paul 
Warburg,  formerly  of  the  Federal  Reserve  Board,  has 
suggested  that  the  index  number  of  prices  should  be 
one  of  the  data  scrutinized  by  the  Federal  Reserve 
Board  to  help  guide  it  in  fixing  the  rate  of  discount. 
Senator  Shafroth  proposed  that  the  Federal  Reserve 
Board  should  fix  discount  rates  in  such  a  manner  as 
to  regulate  credit  with  the  object  of  stabihzing  the  level 
of  prices. 

This  adjustment  would  not  of  itself,  however,  be 
sufficient  to  keep  the  price  level  stable;  for  while  it 
controls  the  credit  superstructure,  it  does  so  only  rela- 
tively to  the  metalhc  base  and  if  this  base  is  uncon- 
trolled relatively  to  the  needs  of  business,  the  credit 
superstructure  being  proportional  to  the  base,  that 
credit  superstructure  is  equally  uncontrolled  relatively 
to  the  needs  of  business. 

But,  given  both  a  stabihzation  of  the  base  and  any 
sound  banking  system,  that  is,  any  system  which  makes 
credit  expand  or  contract  with  an  expansion  or  con- 
traction of  reserves,  we  can  secure  complete  stabili- 
zation. 

8.   International  Aspects  of  the  Plan 

A.  The  Mint  Price.  It  goes  without  sa3dng  that  the 
plan  would  have  a  wider  usefulness  if  adopted  by  all 
nations  than  if  adopted  by  only  one,  or  a  few.  But, 
if  at  first  its  general  adoption  were  not  found  feasible, 
the  question  remains :  Would  the  plan  work  and  work 
well  if  adopted,  say,  by  the  United  States  alone  ? 

Many  persons  have  imagined  that  a  single  nation 
could  not  make  the  plan  work,  that  the  money  prob- 
lem, being  essentially  an  international  one,  requires 
concerted  action,  that  it  is  therefore  imperative  that 
there  should  be  "  the  same  mint  price  of  gold  "  through- 


Sec.  8,  A]  TECHNICAL  DETAILS  173 

out  the  world,  otherwise  gold  would  flee  entirely  from 
or  to  the  nation  which  should  alter  the  present  "  uni- 
form "  price. 

We  shall  see  that  these  ideas  are  mistaken.  In  the 
first  place  let  us  see  clearly  the  "  fallacy  of  the  mint 
price."  Superficial  reasoning,  starting  from  the  fact 
that  our  mint  price  ($20.67  an  ounce  of  pure  gold) 
and  England's  mint  price  (£3.  17s.  lO^d  for  gold 
H  fine)  are  now  "  the  same,"  concludes  that,  if  our 
price  were  lowered  1%,  i.e.  to  $20.46,  while  the  English 
price  remained  unchanged,  all  our  gold  would  be  sent  to 
England  to  take  advantage  of  the  "  higher  "  price  there. 

But  $20.67  would  then  cease  to  be  "  the  same  "  as 
£3.  17s.  lOH  and  $20.46  would  become  "  the  same  " 
as  £3.  17s.  lOid.  !  The  reason  is  that  comparisons  be- 
tween Enghsh  and  American  prices  are  based  on  the 
"  par  of  exchange  "  and  this  par  would  change.  At 
present  the  par  is  $4,866  of  American  money  for  £1  of 
English  money ;  but  this  par  of  exchange  is  based  on 
the  relative  weights  of  the  dollar  and  the  sovereign  ! 
Consequently  a  change  in  the  weight  of  the  dollar 
and  the  price  of  gold  will  change  proportionally  the  par 
of  exchange.  If  the  dollar's  weight  is  changed  1%  so 
that  the  mint  price  becomes  $20.46  (instead  of  $20.67), 
the  par  of  exchange  will  become  $4.82  (instead  of 
$4,861). 

It  is  true  that  each  increase  in  the  weight  of  the 
gold  dollar  in  America  —  in  other  words,  each  fall  in 
the  official  American  price  of  gold  —  would  at  first 
tend  to  discourage  the  minting  of  gold  in  America. 
The  miner  might  send  more  of  his  gold  to  London, 
where  the  mint  price  had  not  changed,  and  "  realize  " 
by  selling  exchange  on  the  London  credit  thus  ob- 
tained. But  the  rate  of  exchange  would  soon  be 
affected  through  these  very  operations  by  which  he 
attempted  to  profit,  and  his  profit  would  soon  be 
reduced  to  zero ;  the  export  of  gold  to  England  would 
increase  the  supply  of  bills  of  exchange  in  America 
drawn   on  London  and  lower   the   rate  of  exchange 


174  STABILIZING   THE    DOLLAR  [App.  I 

until  there  would  be  no  longer  any  profit  in  sending 
gold  from  the  United  States  to  England  and  selling 
exchange  against  it.  When  this  happened  it  would 
be  as  profitable  to  sell  gold  to  American  mints  at 
$20.46  per  ounce  as  to  ship  it  abroad ;  and  $20.46  in 
America  would  be  the  exact  equivalent,  at  the  new  par 
of  exchange  ($4.82),  of  the  English  mint  price  of 
£3.  17s.  lOid. 

Consequently,  although  the  new  mint  price  of  $20.46 
is  in  figures  lower  than  the  old,  yet,  as  it  is  in  heavier 
dollars,  it  would  still  be  "  the  same  "  as  the  English 
mint  price  of  £3.  17s.  lO^d. 

It  is  clear  that  this  sameness  of  mint  price  as  be- 
tween the  two  countries  really  means  nothing  of 
economic  consequence,  for  the  reason  that  all  prices  of 
gold  are  in  terms  of  gold.  At  bottom  the  basic  fact 
is  simply  that  exchange  is  at  par  when  an  ounce  of  gold 
in  America  will,  in  the  exchange  market,  buy  the 
right  to  an  ounce  of  gold  in  England. 

This  obvious  fact  is  concealed,  or  "  camouflaged," 
by  measuring  gold  in  America  in  terms  of  dollars,  and 
gold  in  England  in  terms  of  sovereigns ;  but  the 
dollar  and  the  sovereign  are  merely  units  of  weight, 
like  the  ounce,  with  definite  ratios  to  the  ounce  and  to 
each  other.  Of  course  the  price  of  gold  in  America 
(in  terms  of  itself)  is  "  the  same  "  as  the  price  of  gold 
in  England  (in  terms  of  itself)  when  either  is  trans- 
lated into  the  other  by  means  of  the  par  of  exchange 
(or  ratio  between  the  two  units). 

This  would  be  self-evident  if  the  numbers  were  a 
little  simpler.  Thus,  if  the  dollar  were  exactly  a 
twentieth  of  an  ounce  of  pure  gold  and  the  sovereign 
exactly  a  quarter  of  an  ounce,  the  mint  price  in  America 
would  be  $20.00  an  ounce  and  in  England,  £4  an 
ounce ;  and  the  par  of  exchange  would  be  ^,  or  $5 
per  £.  Naturally,  then,  £4  an  ounce  would  be  "  the 
same  "  price  as  $20  an  ounce  when  we  translate  £'s 
into  dollars  at  $5  per  £,  i.e.  $20  =  5X$4,  or  20  =  ^X4. 
Such  sameness  of  price  would  evidently  still  exist  if  the 


Sec.  8,  B]  TECHNICAL  DETAILS  175 

dollar  were  doubled,  i.e.  were  made  a  tenth  of  an  ounce. 
The  mint  price  in  America  would  then  be  $10  per  ounce 
which  (the  par  of  exchange  being  ^  or  $2i  per  £)  would 
be  "the  same"  as  £4  an  ounce;  for  $10  =  $2iX4,  or 
10  =  YX4. 

To  turn  from  theory  to  experience,  if  those  against 
whom  I  am  reasoning  were  correct,  everybody  would 
now  take  his  gold  to  the  Mexican  mint  where  he  could 
get  twice  as  many  dollars  as  he  can  get  from  the  United 
States  mint!  Obviously  the  fallacy  lies  in  the  fact 
that  Mexican  dollars  are  half  as  heavy  as  ours. 

B.  Gold  Reserves  and  Price  Levels  as  Internation- 
ally Related.  So  much  for  the  effect  of  our  individual 
action  on  the  international  exchanges.  The  second 
effect  to  be  emphasized  is  the  release  of  the  United 
States  from  the  danger  of  alternate  gold  famines  and 
feasts.  At  present  foreign  countries  may  deluge  us  with 
gold  or  drain  it  away.  The  only  effectual  stop  to  the 
inflowing  tide  comes  from  the  rise  of  our  price  level  and 
our  only  important  defense  against  the  continued  ebb  of 
gold  is  from  the  fall  of  our  prices.  Thus  is  our  gold 
reserve  now  at  the  mercy  of  Europe.  Their  bank- 
ing and  currency  policies,  over  which  we  have  no  con- 
trol, their  trade  and  tariffs,  their  wars,  all  affect  our  gold 
supply.  Thus  the  Great  War,  by  dumping  the  gold  of 
the  belligerents  on  neutral  countries  (including,  in  1915- 
1917,  the  United  States),  inflated  prices  in  these  neutral 
countries  and  a  reflux  of  gold  may  deflate  them  when- 
ever Europe  deflates  her  currencies  sufficiently. 

The  only  methods  used  in  the  war  to  safeguard 
against  these  floods  and  ebbs  of  gold  were:  (1)  — as 
against  a  flood  —  the  action  of  Sweden,  Holland,  and 
Spain  virtually  stopping  the  free  coinage  of  gold  and 
(2)  —  as  against  an  ebb  —  the  "  embargo  "  on  the  ex- 
port of  gold  adopted  by  many  countries,  including  the 
United  States. 

These  were  attempts  at  a  partial  control  of  a  nation's 
gold  supply  by  stopping  the  inflow  of  gold  into  the 
nation's  circulation  or  its  outflow  therefrom. 


176  STABILIZING   THE   DOLLAR  [App.  I 

But  the  stabilization  plan  would  afford  a  complete 
control  of  the  amount  of  gold,  measured  in  dollars, 
without  forbidding  or  much  affecting  the  inflow  or 
outflow  of  gold  measured  in  ounces! 

Had  we  had  stabilization  in  1915  we  would  have 
been  protected  against  gold  inflation,  from  which  we 
have  suffered  so  grievously.  When  the  gold  began  to 
flow  in  and  prices  to  rise,  our  gold  dollar  would  have 
been  enlarged.  Also  the  number  of  gold  dollars  in 
the  country  would  have  been  kept  from  increasing, 
despite  the  increase  in  the  physical  amount  of  gold. 
Finally  the  price  level  would  be  kept  from  rising. 

Likewise  we  would  have  been  defended  against  a 
drain  of  gold  and  would  have  needed  no  embargo. 
If  gold  began  to  leave  us  and  prices  to  fall,  gold  dollars 
would  be  lightened,  their  numbers  would  be  thereby 
kept  from  decreasing,  despite  the  decrease  in  the  physi- 
cal amount  of  gold,  and  the  price  level  kept  from  falling. 

If,  then,  the  United  States  should  "go  it  alone," 
we  would  be  emancipated  from  the  present  involuntary 
"  entangling  alliance  "  of  our  currency  with  foreign 
currencies. 

Implied  in  the  last  would  be  the  emancipation  of 
our  price  level  from  its  entangling  alliance  with  foreign 
price  levels.  The  price  level  of  each  country  now 
depends  on  that  of  those  other  countries  which  have 
the  same  monetary  standard.  The  ''  High  Cost  of 
Living,"  one  of  the  manifestations  of  inflation,  com- 
municates itself  from  one  country  to  another  having 
the  same  standard  and  no  one  country  can  avoid  the 
common  contagion  so  long  as  it  has  the  common  un- 
stable unit. 

In  short,  under  our  present  system  our  money, 
credit,  and  price  level  are  far  more  internationally  en- 
tangled than  they  would  be  if  we  had  stabiUzation. 
So  long  as  we  let  the  gold  standard  drift  we  are  help- 
less to  protect  ourselves  from  the  effects  of  our  neigh- 
bors' acts  on  that  standard.  The  close  of  the  war 
makes  us  especially  liable  to  the  influence  of  changing 


Sec.  8,  C]  TECHNICAL  DETAILS  177 

currency  policies  of  Europe,  policies  as  yet  unknown 
and  unknowable.^ 

C.  Exports  and  Imports.  As  to  the  effect  on  inter- 
national trade  in  commodities,  these  effects  would  be 
complex  and  somewhat  varied  according  to  circum- 
stances, though  not,  probably,  important  in  magnitude. 

Suppose  that  the  United  States  had  a  stable  dollar  and 
other  gold  standard  countries  had  not.  Suppose  further 
that  gold  units  tended  throughout  the  world  to  depre- 
ciate and  therefore  that  we  were  obUged  successively  to 
increase  the  weight  of  the  dollar,  i.e.  to  decrease  the 
price  of  gold,  and  thereby  to  lower  the  rate  of  foreign 
exchange  as  measured  in  American  dollars. 

Under  these  circumstances  the  price  level  in  the 
United  States  would  remain  stationary,  the  price  levels 
in  other  countries  would  rise,  and  the  rates  of  exchange 
between  the  United  States  and  those  countries  would 
change  accordingly,  e.g.  exchange  on  London  would 
decline. 

Normally,  or  in  the  long  run,  the  change  in  the  ex- 
change between  two  countries  is  proportional  to  the 
divergence  of  their  price  levels.  Thus,  let  us  assume 
that  prices  in  England  gradually  increase  until  they 
have  doubled  while  those  of  the  United  States  remain 
the  same,  and  that  the  exchange  on  London  falls 
correspondingly  from  $4.86  to  $2.43  per  pound  sterling. 

Under  these  assumptions  imagine  an  American  ex- 
porter who  now  finds  that,  while  the  American  prices 
with  which  he  is  concerned  are  about  the  same,  the 
English  prices  he  can  get  for  his  goods  are  doubled. 
He  receives  a  bill  of  exchange  for  £200  where  before 
he  received  one  for  £100.  But  when  he  sells  the  £200 
bill  at  $2.43  per  pound  he  receives  the  same  $486  which 
he  used  to  get  when  he  sold  the  £100  bill  at  $4.86. 

Evidently  if  the  changes  in  price  level  and  the 
changes  in  the  rate  of  exchange  thus  correspond  to 
each  other,  there  is  neither  gain  nor  loss. 

^  For  further  discussion  see  Appendix  I,  §  4. 

N 


178  STABILIZING   THE    DOLLAR  [App.  I 

So  far  as  gains  or  losses  do  exist  they  are  only  dif- 
ferential and  due  to  the  failure  of  the  price  and  ex- 
change movements  to  correspond  as  exactly  as  is 
assumed  above.  That  is,  there  is  here,  as  always 
where  price  movements  occur,  some  lagging  behind  of 
certain  elements.  These  evils  are  evils  of  transition 
and  tend  to  disappear  as  the  transition,  i.e.  the  price 
movement,  disappears  or  the  movement  is  reversed. 
Whatever  harm  is  done  is  due  not  to  a  changed^ 
price  level,  but  to  a  changing  price  level. 

If,  as  seems  to  be  usually  the  case,  the  rate  of  ex- 
change is  adjusted  more  promptly  than  the  price  level, 
the  exchange  will  reach  $2.43  before  the  price  level  has 
doubled  and  the  exporter  will  receive  less  than  £200 
and,  so,  less  than  $486.  In  this  case  he  would  have 
suffered  somewhat  from  English  inflation  which,  pre- 
sumably, he  would  not  have  suffered  had  there  been 
no  stabilization  and  had  American  prices  but  kept 
pace  with  EngUsh  prices.  On  the  other  hand,  if  the 
pound  sterhng  should  appreciate,  the  American  exporter 
would  gain  slightly. 

Reversely,  the  American  importer  would  gain  a 
little  from  stabilization  when  foreign  price  levels  rose 
and  lose  when  they  fell. 

We  see  that  stabilization  in  one  gold  standard  coun- 
try alone  would  expose  importers  and  exporters  to  the 
chance  of  certain  slight  differential  gains  and  losses, 
one  of  the  two  classes  always  gaining  from  the  malad- 
justment while  the  other  is  losing.  This  evil  of  intro- 
ducing a  new  risk  to  importers  and  exporters  is  offset, 

1  The  common  crude  idea  that  a  mere  difference  in  the  purchasing 
power  of  monetary  units  of  two  countries  will  help  exporters  in  the 
country  with  the  "cheaper"  money  and  hurt  importers  is,  of  course, 
absurd.  If  this  idea  were  correct,  there  would  be  an  enormous 
stimulus  to  the  flow  of  goods  from  Mexico  to  the  United  States  and 
cheek  to  the  flow  from  the  United  States  to  Mexico  because  the 
Mexican  dollar  is  only  half  our  dollar.  Naturally  that  difference 
between  the  dollars  is  fully  taken  into  account.  It  is  only  when  the 
relation  between  the  two  is  disturbed  and  before  the  new  relation 
has  been  fully  taken  into  account  that  exporters  and  importers  are 
affected,  even  in  a  slight  degree. 


Sec.  8,  D]  TECHNICAL  DETAILS  179 

however,  by  the  removal  of  the  old  risks  connected  with 
their  deaUngs  within  the  United  States. 

Furthermore,  since  the  war,  there  is  no  common  gold 
standard  anyway  !  Currencies  are  in  chaos,  both  rela- 
tively and  absolutely.  A  stabihzed  dollar  could  well 
be  resorted  to  as  a  common  denominator  in  foreign 
trade,  just  as  the  old  "  trade  dollar  "  was  resorted  to. 
If  international  contracts  were  drawn  in  stabilized  dol- 
lars we  would  be  freed  from  all  the  uncertainties  of 
roubles,  marks,  lire,  francs,  etc.  These  uncertainties 
would  then  fall  only  on  the  countries  employing  such 
units. 

But  even  if  foreign  trade  were  somewhat  disadvan- 
taged by  stabilization,  we  must  remember  that  usually 
over  nine  tenths  of  American  trade  and  doubtless  a  larger 
fraction  of  American  contracts  are  within  the  borders 
of  the  United  States  so  that,  to  the  great  bulk  of 
Americans,  stabilization  would  be  an  unmixed  blessing. 

It  is  unfortunately  true,  however,  that,  to  most 
people,  international  trade  looms  up,  out  of  its  true 
perspective,  as  a  far  bigger  factor  in  a  nation's  eco- 
nomic life  than  it  ever  really  is.  As  every  teacher 
of  economics  knows,  the  average  citizen,  untutored  in 
economics,  is  a  victim  of  the  old  mercantilistic  fallacy 
and  still  imagines  that  the  old  mercantilistic  phrases 
— ''  favorable  balance  of  trade  "  and  "  unfavorable 
balance  of  trade  "  —  which  have  been  handed  down  to 
us  are  to  be  taken  hterally.  Often  it  is  even  assumed, 
absurd  though  it  obviously  is,  that  the  only  gain 
which  a  country  as  a  whole  can  get  is  in  an  excess  of 
exports  over  its  imports  and  an  accumulation  of  money. 
This  is  not  the  place  to  consider  such  elementary 
errors.  Any  textbook  on  economics  exposes  the 
fallacy ;  and  the  lessons  of  our  recent  experience  with 
an  accumulation  of  gold  should  make  it  clear  that  an 
accumulation  of  money  in  a  country  simply  debases  the 
purchasing  power  of  that  money. 

D.   Spreading  the  Gold  Points.     There  would  then 
be  no  real  international  inconvenience  introduced  by 


180  STABILIZING   THE    DOLLAR  [Apr  I 

the  stabilization  plan  unless  we  count  as  an  incon- 
venience the  fact  that  the  "  gold  points  "  of  exchange 
would,  under  certain  conditions,  be  wedged  a  little 
further  apart  (by  the  amount  of  the  brassage)  than  at 
present.  Even  this  would  not  happen  so  long  as  con- 
ditions were  such  that  in  both  of  the  countries  gold 
is  flowing  into  circulation  and  not  out  (or,  in  both, 
out  and  not  in)  so  that  the  price  of  gold  within  each 
country  remains  continuously  at  the  lower  (or  con- 
tinuously at  the  upper)  of  the  two  limits  set  by  the 
brassage  and  discussed,  in  another  connection,  in 
§  2  above. 

Under  these  conditions,  a  periodical  shift  in  the 
official  prices  of  gold  would  not  widen  the  gap  between 
the  gold  shipping  points ;  it  would  merely  raise  or 
lower  them  both  in  unison.  Nor  would  the  re- 
versal of  the  golden  stream  from  an  ^nf^ow  into  circu- 
lation to  an  outHow  from  circulation  widen  that  gap, 
provided  the  reversal  took  place  simultaneously  in 
both  countries.  Only  when  it  happened  that  gold 
would  flow  into  circulation  in  (say)  the  United  States 
and  out  of  circulation  in  (say)  England,  would  the 
gold  shipping  points  between  the  two  countries  be 
spread  apart  by  the  amount  of  the  brassage. 

By  proper  international  arrangements  as  to  ex- 
change, even  this  occasional  result  could  be  avoided. 
The  international  exchange  could  be  itself  stabilized  at 
Government  expense  as  has  been  done  during  the  war. 

E.  The  Adoption  of  the  Plan  Would  Spread.  Thus,  on 
the  merits  of  the  question,  there  is  little  or  nothing  to 
be  said  against  stabilization  by  one  country  alone, 
while  its  advantage  to  the  country  adopting  it  would 
be  very  great  indeed.  In  this  connection  I  may  call 
attention  to  a  recent  dispatch  from  London  which 
says  :  "  English  capitalists  are  certain  that  the  country 
which  first  succeeds  in  reorganizing  its  currency  will  be 
able  to  obtain  a  large  share  of  international  business." 

Sooner  or  later  the  perception  of  the  advantages  of 
stabilization  would  probably  lead  to  the  general  adop- 


Sec.  8,  E]  TECHNICAL  DETAILS  181 

tion  of  the  stabilization  principle.  This  might  come 
about  either  at  once  by  concerted  action  or  gradually 
by  individual  action. 

With  a  league  of  nations,  joint  action  in  such 
matters  will  be  far  easier  than  ever  before ;  and  we 
must  not  forget  that  there  was  joint  action  once  in 
the  case  of  the  ''  Latin  Union  "  which  maintained 
bimetalhsm.  In  this  case  France,  Belgium,  Switzer- 
land, Greece,  and  Italy  joined  in  a  uniform  standard  of 
currency  based  on  gold  and  silver.  The  present  exi- 
gency will  create  a  powerful  motive  toward  some  such 
action. 

The  war  has  upset  the  monetary  standards  of  the 
whole  world  and  has  brought  forward  the  questions 
of  resumption,  deflation,  high  cost  of  Uving,  and  price 
movements  generally.  All  of  these  are  related  to  the 
more  fundamental  question  of  a  standard  of  value,  of 
which  that  of  stabilization  is  an  unescapable  part. 

Monetary  standards  already  constitute  an  inter- 
national question  because,  under  our  present  system, 
any  disturbance  in  the  price  level  in  one  country 
necessarily  affects  the  price  levels  of  the  rest. 

If  the  stabilization  plan  w^ere  adopted  internation- 
ally, there  should,  of  course,  be  a  common  index  num- 
ber. This  would  not  sacrifice  greatly  the  accuracy  of 
adjustment  for  any  one  nation ;  for  we  have  already 
seen  that  the  index  numbers  of  different  countries 
having  the  same  monetary  standards  are  very  similar 
and  we  know  that,  with  the  future  development  of 
international  trade,  there  will  come  about  an  even 
closer  harmony  of  price  movements. 

In  case  joint  action  could  not  be  secured  at  the 
outset,  individual  action  by  one  country,  especially  if 
that  country  were  the  United  States,  would,  almost 
certainly,  lead  to  the  general  adoption  of  the  plan. 

Objectors  point  out  that  this  was  not  true  of  bi- 
metallism. Their  argument  is  that  if  an  agreement  on 
international  bimetallism  could  not  be  secured  we 
cannot  hope  to  secure  anything  so  ambitious  as  an 


182  STABILIZING  THE   DOLLAR  [App.  I 

international  standardization  of  monetary  units  and 
that,  therefore,  we  need  not  trouble  ourselves  about 
attempting  the  impossible.  But,  as  one  will  see 
by  reading  H.  B.  Russell's  book  on  "International 
Monetary  Conferences,"  when  the  proposal  to  re- 
sume bimetallism  was  made  there  was  a  special  obstacle 
which  would  not  exist  in  the  case  of  the  stabilization 
plan. 

This  obstacle  was  the  realization,  based  on  the  ex- 
perience of  the  Latin  Union,  that  when  any  nation  or 
nations  have  bimetaUism  in  successful  operation,  all 
the  other  nations  enjoy  its  benefits  as  much  as  if  they 
had  it  themselves  but  without  the  trouble  or  responsi- 
bihty  of  operating  it.  For  instance,  the  Latin  Union 
had,  as  an  intermediary  between  the  gold  standard 
countries  and  the  silver  standard  countries,  virtually 
held  together  the  rupee  and  the  pound  sterling  in  a 
fixed  ratio  to  the  great  benefit  of  England  without 
effort  on  her  part.  Under  such  conditions,  for  a  long 
time  after  bimetallism  broke  down  in  1873,  almost 
every  nation  wanted  some  other  nation  to  restore  it 
but  wanted,  if  possible,  to  avoid  doing  so  for  itself ! 
In  modern  slang  each  would  "  let  George  do  it." 

In  the  case  of  the  standardized  dollar,  on  the  other 
hand,  if  one  nation  should  break  the  inertia  of  custom 
and  adopt  the  plan,  and  if  it  were  soon  seen  that  this  na- 
tion was  getting  benefits  from  it  while  all  the  other  na- 
tions lacked  these  benefits  and,  in  fact,  were  being  some- 
what injured  by  the  upset  in  their  exchange  pars,  these 
other  nations  would  soon  want  to  come  in,  as  the  only 
way  to  escape  the  evils  and  secure  the  benefits.  The 
case  would  be  analogous,  not  to  the  reluctant  atti- 
tude toward  international  bimetaUism,  but  to  the 
"  scramble  "  of  nations  to  get  on  to  the  gold  standard. 
After  the  breakdown  of  bimetaUism  in  1873  commer- 
cial nations  turned,  one  after  another,  to  the  gold 
standard  in  order  to  secure  the  advantage  of  a  stable 
rate  of  exchange  on  London  and  other  important 
commercial  centers. 


Sec.  9,  A]  TECHNICAL  DETAILS  183 

9.  Numerical  Illustrations  under  Various  Assumptions 

A.  The  Standard  Hypothetical  Case.  A  mental  pic- 
ture of  the  actual  operation  of  the  stabilizing  process 
can  best  be  obtained  from  illustrative  numerical  ex- 
amples, such  as  are  considered  in  this  section. 

There  are  five  factors  determining  the  stabilization 
process :  the  "  brassage  "  charge,  which  serves  as  the 
limit  on  any  single  adjustment  of  the  dollar's  weight, 
the  amount  of  "  adjustment  "  of  the  dollar's  weight 
for  a  given  deviation  from  par  of  the  index  number, 
the  amount  of  the  "  influence  "  which  said  adjustment 
has  on  the  index  number,  the  "  lag  "  of  time  elapsing 
between  the  adjustment  and  completion  of  its  in- 
fluence, and  the  prior  ''  te7idency  "  of  the  price  level 
to  rise  or  fall,  were  it  not  combated  by  the  stabiliza- 
tion process. 

Our  first  example  will  be  called  the  "  standard 
hypothetical  case."  In  later  sections  the  several  con- 
ditions will  be  separately  varied  from  those  of  this 
standard  case. 

The  standard  hypothetical  case  assumes  the  five  fac- 
tors to  be  as  follows  : 

(1)  Brassage  charge  :   1%. 

(2)  Adjustment  rule:  1%  for  each  1%  of  deviation 
from  par  of  the  index  number  (no  one  adjustment  to 
exceed  the  brassage). 

(3)  Influence  thereof  on  index  number:  1%  for 
each  1%  of  adjustment. 

(4)  Lag  of  said  influence  following  the  adjustment 
causing  it :    1  adjustment  interval.^ 

(5)  Tendency  of  price  level :  were  it  not  for  stabiliza- 
tion the  price  level  would  at  first  increase  1%  each  in- 
terval ;  afterward,  it  would  decrease  1%  each  interval. 

The  fifth  assumption  implies  that,  were  it  7iot  for 
stabilization,  the  index  number  would  be : 

1  We  may,  to  fix  our  ideas,  consider  this  interval  between  succes- 
sive adjustment  dates  to  be  two  months.  But  its  absolute  length 
affects  neither  the  argument  nor  the  calculations. 


184  STABILIZING  THE   DOLLAR  [App.  I 

At  beginning  of  the  1st  interval  100. 

At  the  beginning  of  the  2d  interval  1%  above  100 
or  101. 

At  the  beginning  of  the  3d  interval  1%  above  101 
or  102.01. 

At  the  beginning  of  the  4th  interval  1%  above  102.01 
or  103.0301. 

At  the  beginning  of  the  5th  interval  1%  above 
103.0301  or  104.060401. 

Etc.,  increasing  as  by  compound  interest. 

Not  to  put  too  fine  a  point  on  these  figures,  we  may 
omit  decimals  and  use  the  figures  100,  101,  102,  103, 
104,  etc.,  until  the  "  compounding  "  produces  an  appre- 
ciable effect.  When,  for  instance,  the  index  number 
is  in  the  neighborhood  of  150  the  1%  increase  will  make 
the  next  index  number  greater  by  about  H ;  and  when 
it  is  in  the  neighborhood  of  200,  the  1%  increase  will 
make  a  difference  of  about  2.  Thus,  if  we  assume  that 
(were  it  not  for  stabilization)  the  course  of  prices 
would  rise  1%  each  adjustment  interval  from  100  to 
200  and  then  fall,  the  index  numbers  would  run  approxi- 
mately as  follows :  100,  101,  102,  103,  104,  .  .  .  150, 
15H,  153,  .  .  .  198,  200,  198,  196,  .  .  .  150,  148+, 
147,  .... 

Under  the  fifth  assumption,  we  may  distinguish 
four  types  of  price  movements  —  the  four  which 
could  take  place  in  actual  experience,  —  a  rise,  a  fall,  a 
reverse  after  an  upward  movement,  a  reverse  after  a 
downward  movement. 

We  are  now  ready  to  calculate  ^  what,  under  the  five 
assumptions  formulated,  the  stabilized  course  of  the 
index  number  will  be. 

At  the  start,  the  index  number  being  100  or  par,  no 
adjustment  in  the  dollar's  weight  will  be  made.     Con- 

1  In  all  the  calculations  of  this  section  it  is  assumed  that  either 
the  mint  price  rules  the  market  all  the  time  or  the  redemption  price 
rules  it  all  the  time.  If,  or  when,  the  market  price  shifts  between  the 
tAvo,  in  the  manner  discussed  in  Appendix  I,  §  2,  the  results  would  be 
slightly  different,  as  can  readily  be  calculated. 


Sec.  9,  A]  TECHNICAL  DETAILS  185 

sequently,  during  the  ensuing  or  first  interval,  the 
index  number  will  be  subject  only  to  the  assumed 
tendency  to  rise  1%,  so  that,  at  the  beginning  of  the 
next  adjustment  interval,  it  will  be  101,  just  as  though 
no  system  of  stabilization  existed. 

At  this  adjustment  date,  therefore,  there  is  a  devia- 
tion from  par  of  the  index  number  of  +1%.  This 
leads  (by  assumption  2)  to  an  adjustment  of  the 
dollar's  weight  of  1%. 

The  influence  of  this  adjustment  will  (by  assump- 
tion 4)  be  felt  during  the  ensuing  interval  and  be  regis- 
tered at  its  close.  That  influence  is  (by  assumption  3) 
1%.  If  there  were  no  other  force,  therefore,  than  this 
par-ward  influence,  the  index  number  would  then  re- 
turn to  100,  or  par. 

But  there  is  another  force ;  namely,  the  tendency  of 
the  index  number  to  rise  1%  during  this  (second) 
interval.  This  force  restrains  the  index  number  from 
returning  to  par  and  keeps  it  at  101.  In  short,  the 
downward  and  upward  forces  neutralize  each  other  so 
that  the  index  number  remains  unchanged  at  101. 

Summarizing  thus  far,  we  may  schedule  the  events 
as  follows : 

At  beginning  of  1st  interval :  index  number  100  ;  no 
adjustment  of  dollar's  weight. 

During  1st  interval :  no  influence  from  adjustment, 
but  only  unhindered  tendency  of  index  number  to  rise, 

+  1%. 

At  beginning  of  2d  interval :  index  number,  101 ;  ad- 
justment of  dollar's  weight,  +1%. 

During  2d  interval :  influence  of  aforesaid  adjust- 
ment on  index  number,  —1%,  neutralizing  tendency 
of  index  number  to  rise,  +1%,  leaving, 

At  beginning  of  3d  interval :  index  number  un- 
changed at  101. 

But  the  deviation  from  par  being  still  +1%,  the  ad- 
justment in  weight  at  the  adjustment  date  now  reached 
(the  beginning  of  the  3d  interval)  is  again  + 1  %,  which 
will  again  strive  to  bring  down  to  par  the  index  number 


186 


STABILIZING  THE   DOLLAR 


[App.  I 


during  the  3d  interval  by  1%,  and  again  be  foiled  by 
the  1%  rising  tendency. 

The  same  reasoning  gives  precisely  the  same  result 
for  each  subsequent  adjustment  interval,  as  long  as  the 
1%  upward  tendency  continues. 

That  is,  in  each  case,  the  new  index  number  is  the 
last  index  number  (101)  minus  the  1%  influence  toward 
par,  due  to  adjusting  the  dollar's  weight,  plus  the  1% 
tendency  to  rise. 

Thus,  at  each  successive  milestone,  the  formula  for 
finding  the  new  index  number  in  terms  of  the  old  is 
101  —  1  +  1  =  101,  as  long  as  the  1%  upward  tendency 
exists. 

The  sequence  is : 


Itifluence  OF 

Tendency  op 

Index  Number  i 

Adjustment  on 

Index  Number, 

Index  Number 

IP  Unstabilized 

Beginning  of  1st  interval 

100 

During  1st  interval 

0 

+  1% 

Beginning  of  2d  interval 

101 

During  2d  interval 

-1% 

+  1% 

Beginning  of  3d  interval 

101 

During  3d  interval 

-1% 

+  1% 

Etc.,  repeating. 

1  This  column  also  shows  (by  subtracting  100)  the  deviation 
from  par  and  the  adjustment  of  the  dollar's  weight,  which  is  equal 
thereto. 


When  the  downward  tendency  begins,  the  price  level 
in  the  first  adjustment  interval  will  fall  from  101  to  99. 
The  reason  is  that,  during  this  interval,  the  1%  in- 
fluence exerted  by  the  adjustment  in  the  weight  of  the 
dollar  is  reenforced  by  the  assumed  tendency  to  fall  1%. 
That  is,  the  index  number  after  the  first  interval  of  fall 
will  be  101-1-1=99. 

The  index  number,  99,  is  now  1%  below  par,  i.e.  the 
deviation  is  now   —1%.     The  dollar  will,   therefore, 


Sec.  9,  A] 


TECHNICAL  DETAILS 


187 


be  reduced  in  weight  1%.  The  influence  of  this  adjust- 
ment will  now  be  1%  upward,  counteracted,  however,  by 
the  1%  tendency  to  fall,  still  assumed  to  exist.  That  is, 
the  next  index  number  will  be  99  plus  the  1  %  influence 
less  the  1%  tendency,  or  99+1  —  1=99;  and  it  will, 
thereafter,  remain  99  as  long  as  the  tendency  to  fall 
continues. 

Assuming,  to  fix  our  ideas,  that  the  reversal  from 
an  upward  to  a  downward  movement  occurs  at  the  point 
at  which  the  index  number  would  have  reached  200 
had  there  been  no  stabilization,  the  index  numbers  in 
successive  adjustment  intervals  are  given  (omitting 
decimals)  in  the  following  table  as  they  would  be, 
both  without  and  with  stabilization. 


Without  Stabilization 

With  Stabilization 

100 

100 

101 

(100           +  1 

=  )  101 

102 

(101  -1+1 

=  )  101 

103 

(101  -1+1 

=  )  101 

104 

(101  -1+1 

=  )  101 

150 

(101  -1+1 

=  )  101 

151^ 

(101  -1+1 

=  )  101 

153 

(101  -1+1 

=  )  101 

1541 

(101  -1  +  1 

=  )  101 

198 

(101  -1+1 

=  )  101 

200 

(101  -1+1 

=  )  101 

198 

(101  -  1  -  1 

=  )    99 

196 

(99  +  1-1 

=  )    99 

194 

(99  +  1-1 

=  )    99 

etc. 

etc. 

etc. 

From  the  standard  hypothetical  case,  just  calcu- 
lated, experimental  departures  will  be  made  in  order 
to  determine  what  set  of  rules  will  serve  best  in 
controlling  price  movements,  as  they  are  actually 
experienced. 


188  STABILIZING    THE    DOLLAR  [Apr  1 

B.   Changing  the  Assumption  as  to  the  " Lag.^' 

(a)  Assumptions  same  as  in  standard  case  except:  lag 
changed  from  1  to  2  adjustment  intervals.^ 

The  index  number,  being  uninfluenced  by  stabili- 
zation, will  follow  the  assumed  tendency  for  two  adjust- 
ment intervals,  and  run :  100,  101,  102. 

That  is,  at  the  start,  or  beginning  of  the  first  in- 
terval, there  is  no  deviation  from  par  and  so  no  adjust- 
ment in  weight ;  at  the  beginning  of  the  second  interval 
there  is  an  adjustment  in  weight  of  +1%  ;  but,  as  the 
lag  between  this  adjustment  and  its  influence  on  the 
index  number  is  now  assumed  to  be  two  adjustment 
periods,  the  following  index  number  is  unaffected  and 
remains  102. 

The  par-ward  influence  (assumed  as  1%)  of  the  1% 
adjustment  made  at  the  beginning  of  the  second  interval 
will,  under  our  present  assumptions,  be  felt  during  the 
third  interval.  During  that  interval  this  par- ward 
influence  will  strive  to  bring  the  index  number  down  1  % 
from  102.  But  the  assumed  upward  tendency  of  1% 
keeps  the  index  number  at  102.  At  the  beginning  of 
the  third  interval,  the  2%  deviation  would  cause 
a  2%  increase  in  the  weight  of  the  dollar,  were  it 
not  for  the  brassage  charge  limiting  any  one  increase 
in  the  dollar's  weight  to  1%,  which  will  therefore 
be  the  increase  effected.  This  1%  increase  in  the 
dollar's  weight,  made  at  the  beginning  of  the  third 
adjustment  interval,  influences  the  index  number  dur- 
ing the  fourth  interval  to  pull  it  downward ;  but  the 
upward  tendency  will  keep  it  still  at  102,  Thus  the 
formula  will  be :  102  (the  index  number  at  any 
adjustment  date)  — 1  (the  influence  of  the  adjustment 
at  the  preceding  date)  +  l  (the  tendency  to  increase) 
=  102. 

The  following  table  shows  the  results : 

1  Since  the  lag  is  beyond  our  regulation,  while  the  adjustment 
interval  is  what  we  make  it,  the  lengthening  of  the  lag  in  terms  of 
adjustment  intervals  really  means,  in  practice,  the  shortening  of  the 
adjustment  interval  in  terms  of  the  lag. 


Sec.  9,  B] 


TECHNICAL  DETAILS 


189 


Index  Numbeb> 

Influence  op 
Adjustment 

Tendency,  if 
Unstabiuzed 

Beginning    1st   interval 

100 

During  1st  interval 

0 

+  1 

Beginning    2d    interval 

101 

During  2d  interval 

0 

+  1 

Beginning  3d  interval    . 

102 

During  3d  interval 

- 1 

+  1 

Beginning   4th   interval 

102 

During  4tli  interval 

- 1 

+  1 

Etc.,  repeating. 

^  This  column  also  shows  (by  subtracting  100)  the  deviation  from 
par  and  the  adjustment  of  the  dollar's  weight  (except  as  this  is 
limited  to  1%  by  the  brassage). 

Upon  reversal  of  the  assumed  price  tendency  the 
stabiHzed  index  number  falls  to,  and  remains  slightly 
below,  par. 

(6)  Assumptions  same  as  in  standard  case  except: 
lag  changed  to  3  adjustment  intervals. 

Following  the  same  reasoning  as  under  "  a,"  we  find 
the  index  number  rising  to  103,  and  then  remaining  at 
103,  the  influence,  thereafter,  of  the  1%  adjustment 
being  exactly  neutralized  so  long  as  the  1%  tendency  to 
rise  continues. 

(c)  Conclusion  as  to  lag. 

In  the  preceding  examples  the  stabilization  process 
is  very  simply  and  effectively  applied,  the  restrain- 
ing influence  sooner  or  later  (depending  on  the  ratio 
between  the  lag  and  the  adjustment  interval)  taking 
effect  and  thereafter,  while  unable  to  restore  the  index 
number  to  par  on  account  of  the  steady  upward  (or 
downward)  tendency,  keeping  the  index  number  con- 
stant at  a  point  slightly  above  (or  below)  par. 

We  see  that  the  greater  the  lag  in  proportion  to  the  ad- 
justment interval,  the  greater  is  the  range  of  the  index 
number  from  par.  Yet,  even  if  the  lag  is  many  times  the 
adjustment  interval,  the  index  number  keeps  near  par. 


190  STABILIZING   THE    DOLLAR  [App.  I 

Thus,  if  the  adjustment  interval  is  two  months  and 
it  is  assumed  that  the  effect  of  any  adjustment  were 
not  felt  until  six  times  that  interval,  or  a  whole  year, 
the  index  number  would  at  most  deviate  only  6%, 
assuming  the  other  conditions  unchanged  from  the 
standard  case. 

As  a  matter  of  fact  the  lag  is  not  great. 

Our  experience  during  the  war  and  other  evidence 
mentioned  elsewhere  (Chapter  II,  §  8  and  Appendix  I, 
§  3)  show  that  the  influence  of  inflation  or  contraction 
is  apparently  rather  prompt,  the  lag  being  probably  less 
than  two  months,  and  possibly  less  than  one  month  for 
an  index  number  composed  of  the  most  responsive 
commodities. 

It  is  desirable  that  our  adjustment  intervals  should 
not  be  too  short  compared  with  the  lag,  say  not  shorter 
than  a  quarter  of  the  lag. 

On  the  other  hand,  the  adjustment  interval  might 
be  taken  longer  than  the  lag.  For  such  a  case  the 
calculations  and  results  would  be  the  same  as  where 
the  lag  is  one  entire  period.  The  influence  of  the  ad- 
justment would  then  be  complete  some  time  before  the 
following  adjustment  date  arrived ;  but  since  no  index 
number  is  calculated  during  the  interval,  our  calcu- 
lations would  not  be  affected. 

Ideally,  i.e.  to  secure  the  greatest  attainable  degree 
of  closeness  to  par,  the  adjustment  interval  should  be 
as  nearly  equal  to  the  lag  as  possible.  If  the  interval 
is  shorter  than  the  lag  the  influence  is  not  felt  fully 
until  another  adjustment,  perhaps  in  the  opposite  direc- 
tion, is  made.  A  daily  adjustment  would  therefore 
not  help  but  hurt  the  closeness  of  the  approximation. 
If  the  interval  is  longer  than  the  lag,  the  price  level 
is  left  for  the  balance  of  the  interval  to  vary  uncor- 
rected. We  would  be  neglecting  the  opportunity  to 
correct  it  promptly. 

C.    Changing  the  Assumption  as  to  the  ''  Tendency." 

(a)  Assumptions  same  as  in  standard  case  except :  tend- 
ency increased  from  1%  to  2%  per  adjustment  interval. 


Sec.  9,  D]  TECHNICAL  DETAILS  191 

Although  the  assumption  hitherto  made  (of  a  1% 
change  in  price  level  during  every  adjustment  interval) 
implies  a  very  rapid  change  (if  the  adjustment  interval 
is  two  months),  we  shall  now  assume  a  movement  twice 
as  rapid. 

In  this  case,  the  index  number  will  be  102  at  the 
end  of  the  first  adjustment  interval.  This  deviation 
calls  for  an  increase  of  2%  in  the  dollar's  weight,  but 
the  brassage  charge  limits  this  increase  to  1%.  Hence, 
at  the  end  of  the  second  interval  the  index  number  is 
acted  upon  by  two  forces,  the  restraining  influence 
(from  the  increased  weight  of  the  dollar)  of  —1%  and 
the  tendency  to  a  further  increase  of  +2%.  The  net 
result  is  +1% ;  that  is,  the  index  number  becomes  103. 
At  the  next  adjustment  period  a  similar  conflict  be- 
tween a  1%  decrease  and  a  2%  increase  causes  the 
index  number  to  become  104,  and  this  process  con- 
tinues. In  short,  instead  of  increasing  by  2%  each 
adjustment  interval,  the  index  number  increases  by  1%. 
The  stabilization  process,  under  these  circumstances, 
cannot  altogether  control  the  price  tendency,  as  long  as 
this  continues  upward,  but  can  decrease  it  by  half.  On 
the  reverse  movement,  after  passing  par,  the  movement 
below  par  is  similarly  retarded  by  stabilization. 

If,  however,  the  brassage  limitation  permitted  a 
larger  adjustment,  the  restraint  would,  of  course,  be 
more  effective.  We  shall  see  this  clearly  after  the 
effects  of  different  amounts  of  brassage  are  shown. 

(&)  Conclusion  as  to  tendency. 

We  conclude  that  the  greater  the  tendency  of  the  index 
number  to  vary,  the  further  the  index  number  will  de- 
viate from  par  before  being  arrested  —  especially  if  the 
tendency  exceeds  the  brassage  —  but  that,  unless  the 
tendency  to  change  is  very  great  or  long  continued  or 
both,  the  index  number  will  still  stay  close  to  par. 

D.   Changing  the  Assumption  as  to  the  "Brassage." 

(a)  Assumptions  same  as  in  standard  case  except: 
brassage  changed  from  1%  to  2%. 

The  results  are  exactly  the  same  as  in  the  standard 


192  STABILIZING   THE    DOLLAR  [App.  I 

case.  The  higher  brassage  makes  no  difference  be- 
cause it  was  already  high  enough  not  to  Umit  the  adjust- 
ment, the  tendency  and  lag  also  being  as  assumed. 

(6)  Assumptions  same  as  in  standard  case  except: 
brassage  changed  from  1%  to  2%,  and  also:  tendency, 
first  upward  and  later  downward,  changed  from  l%to2%. 

Under  these  conditions,  the  restraining  influence 
exactly  neutralizes  the  tendency  and  the  index  number 
is  stabilized  at  102  (during  the  upward  tendency)  and 
at  98  (during  the  downward  tendency). 

(c)  Assumptions  same  as  in  standard  case  except: 
brassage  changed  from  1%  to  2%  and  also:  Isig  changed 
from  1  to  S  adjustment  intervals. 

In  this  case,  the  stabilization  process  results,  while 
the  price  tendency  is  upward,  in  a  movement  of  the 
index  number  between  1%  below  par  and  5%  above 
par.  At  reversal,  the  index  number  at  first  drops  as 
low  as  93,  but  recovers  and  (during  the  downward 
tendency)  fluctuates  between  1%  above  par  and  5% 
below  par. 

(d)  Conclusion  as  to  brassage. 

We  conclude  that,  in  general,  the  greater  the  bras- 
sage the  greater  the  freedom  of  the  index  number  to 
vary.  It  is  freer  to  approach  toward  par;  but  it  is 
also  freer  to  depart  from  par,  if  the  lag  is  very  great, 
i.e.  if  the  adjustment  interval  is  made  a  very  small 
fraction  of  the  lag. 

Practically,  the  brassage  should  be  between,  say,  1  % 
and  3%.  Within  such  limits  it  makes  remarkably 
little  difference  to  the  result  whether  the  exact  figure 
is  near  one  extreme  or  the  other  and  any  figure  within 
these  limits  is  adequate  to  secure  a  close  approxi- 
mation of  the  index  number  to  par  except  under  most 
extraordinary  conditions  such  as  those  existing  in  a 
World  War. 

E.   Changing  the  Assumption  as  to  the  "  Adjustment.' ' 

(a)  Assumptions  same  as  in  standard  case  except: 
adjustment  changed  from  1%  to  2%  (per  1%  deviation). 

The  results  are  exactly  the  same  as  in  the  standard 


Sec.  9,  E] 


TECHNICAL  DETAILS 


193 


case.  The  larger  adjustment  would  make  no  differ- 
ence because  the  brassage  limitation  would  prevent  it 
from  taking  effect. 

(b)  Assumptions  same  as  in  standard  case  except: 
adjustment  changed  from  1%  to  2%  and  also:  brassage 
changed  from  1%  to  2%  or  above. 

A  deviation  above  par  of  1  %  would  then  call  forth  a 
2%  increase  in  the  weight  of  the  dollar.  The  influence 
of  this  2%  adjustment  would  be  to  decrease  the  index 
number  by  2%,  which  influence,  however,  would  be 
partly  neutralized  by  the  assumed  upward  tendency  of 
1%.  The  net  result  would  be  a  fall  of  1%  which  would 
bring  the  index  number  back  to  100  at  the  next  ad- 
justment date.  This  would  call  for  no  adjustment  in 
the  next  period,  and  the  index  number,  being  acted  upon 
only  by  the  upward  tendency,  would  become  101.  Thus 
it  would  continue  to  alternate  between  100  and  101. 

(c)  Assumptions  same  as  in  standard  case  except: 
adjustment  changed  from  1%  to  ^%. 

We  find  the  following  results : 


Index  Number' 

Influence 

Tendency 

Beginning  1st  interval  . 

100 

During  1st  interval  .     . 

0 

+  1 

Beginning  2d  interval  . 

101 

During  2d  interval    .     . 

1 

T    2 

+  1 

Beginning  3d  interval    . 

lOU 

During  3d  interval    .     . 

_     3 

+  1 

Beginning  4th  interval 

101  f 

During  4th  interval  . 

-1 

+  1 

Beginning  5th  interval 

1011 

During  5  th  interval  .     . 

-If 

+  1 

Etc. 

1  This  column  also  shows  (by  subtracting  100)  the  deviation  from 
par  and  (by  subtracting  100  and  dividing  by  2)  the  adjustment  of 
the  dollar's  weight.  The  latter  is  also  always  equal,  numerically, 
to  its  influence,  given  in  the  second  column. 

The  index  number  increases  but  never  reaches  102. 

{d)  Conclusion  as  to  adjustment. 

We  conclude  that  the  nearer  the  adjustment  is  to 


194  STABILIZING  THE   DOLLAR  [App.  I 

the  deviation  the  better  stabiHzation  will  work  —  al- 
ways assuming,  of  course,  that  the  influence  of  the 
adjustment  is  as  in  the  standard  case. 

F.   Changing  the  Assumption  as  to  '' Influence." 

(a)  Assumptions  same  as  in  standard  case  except: 
influence  decreased  from  1%  to  ^%  {per  1%  of  adjust- 
ment) . 

We  have  hitherto  assumed  that  an  adjustment  of  1% 
in  the  dollar's  weight  would  influence  its  purchasing 
power  1%.  But  this  need  not  be  assumed  and  would 
not  be  strictly  true  in  practice,  especially  if  the  num- 
ber of  dollars,  both  of  money  in  circulation  and  of 
deposits  subject  to  check,  were  not  kept  strictly 
proportioned  to  the  number  of  gold  dollars  in  the 
reserve  (as  by  the  method  described  in  Appendix  I, 
§land§7). 

The  calculations,  in  the  present  case,  are  very  sim- 
ilar to  those  of  ''  E  (b)  "  above. 

Calling  the  original  price  level  100%,  the  index 
number  at  the  end  of  the  first  adjustment  period  will 
be  101%.  The  dollar  will  now  be  increased  by  1% 
which,  according  to  our  present  supposition,  would 
tend  to  lower  the  price  level  only  half  as  much,  i.e.  i%. 
As,  during  the  second  interval,  the  price  level  tends 
to  go  up  1%  the  new  index  number  will  be  101  —  ^^+1 
or  10  H.  The  excess  of  1^%  above  par  will  now  call 
for  a  corresponding  increase  in  the  dollar's  weight ; 
but  the  brassage  limitation  holds  it  to  1%. 

Accordingly,  the  next  adjustment  date  will  see  an 
increase  in  the  dollar's  weight  of  1  %  and  the  price  level 
will  be  lOH— i-f-1  or  102.  The  next  increase  in  the 
dollar's  weight  will  be  again  limited  to  1%  and  the  in- 
dex number  will  be  102  — 1^+1  or  102^,  and  so  on. 

Evidently,  as  the  brassage  is  1%  the  power  of  the 
system  to  stabilize  will  be  limited  to  ^%  per  adjust- 
ment interval. 

(b)  Assumptions  same  as  in  standard  case  except: 
influence  changed  from  1%  to  ^%  and  also :  brassage 
changed  from  1%  to  2%  or  more. 


Sec.  9,  F]  TECHNICAL  DETAILS 

The  results  are,  evidently : 


195 


Index  Number' 

Influence 

Tendency 

Beginning  1st  interval  . 

100 

During  1st  interval  .     . 

0 

+  1 

Beginning  2d  interval  . 

101 

During  2d  interval    .     . 

1 

2 

+  1 

Beginning  3d  interval    . 

lou 

During  3d  interval    .     . 

3 

4 

+  1 

Beginning  4th  interval  . 

lOlf 

During  4th  interval  .     . 

7 
8 

+  1 

Etc. 

1  This  column  also  shows  (by  subtracting  100)  the  deviation  from 
par  and  the  adjustment  of  the  dollar's  weight,  which  is  equal  thereto. 

The  stabilization  now  keeps  the  index  number  within 
2%  of  par,  the  figures  being  identical  with  those  of 
"  E  (c)  "  above,  although  the  conditions  as  to  the 
adjustment  and  its  influence  are  different. 

(c)  Assumptions  same  as  in  standard  case  except: 
influence  changed  from  1%  to  2%. 

The  index  number  will  alternate  between  100  and 
101  as  follows : 


Index  Number i 

Influence 

Tendency 

Beginning  1st  interval  . 

100 

During  1st  interval  .     . 

0 

+  1 

Beginning  2d  interval  . 

101 

During  2d  interval    .     . 

-  2 

+  1 

Beginning  3d  interval    . 

100 

During  3d  interval    .     . 

0 

+  1 

Etc. 

101 

1  This  column  also  shows  (by  subtracting  100)  the  deviation  and 
(by  subtracting  100  and  multiplying  by  2)  the  adjustment. 

(d)  Conclusions  as  to  influence. 
We  conclude  that  the  adjustment  of  the  dollar  may 
be  greater  or  less  than  the  influence  it  has  on  the  index 


196  STABILIZING  THE   DOLLAR  [App.  I 

number  without  greatly  lessening  the  efficiency  of 
stabilization. 

(r.  General  Conclusions  on  Variations  from  the  As- 
sumptions of  the  Standard  Case.  We  have  seen  that 
the  stabilization  device  is  such  as  to  adapt  itself,  in 
a  remarkable  degree,  to  widely  varying  conditions. 

The  brassage  charge  may  be  anything  from,  say,  1% 
to  3%  without  greatly  affecting  the  results  and  also 
(under  any  ordinary  conditions)  without  impairing 
greatly  the  efficiency  of  stabilization. 

The  adjustment  of  the  dollar's  weight  may  be  any- 
thing from,  say,  1%  to  2%  per  1%  of  deviation  without 
very  greatly  impairing  the  efficiency  of  stabilization,  — 
at  least  under  reasonable  assumptions  as  to  the  other 
factors  (influence,  tendency,  lag,  and  brassage). 

The  influence  of  the  adjustment  on  the  index  number 
may  be  anything  from,  say,  i%  to  2%  per  1%  of  adjust- 
ment without  greatly  affecting  the  results,  —  at  least 
under  reasonable  assumptions  as  to  the  other  factors. 

The  lag  may  vary  widely  relatively  to  the  adjustment 
interval.  Practically  tliis  means  that  the  frequency 
of  adjustment  may  (other  things  equal)  be  anything 
from,  say,  a  quarter  of  the  lag  to  many  times  the  lag 
without  greatly  restricting  stabilization. 

The  tendency  of  prices  to  rise  or  fall  may  be  perma- 
nently rapid  and  temporarily  very  rapid  without  often 
pulling  the  index  number  more  than  1  or  2%  from 
par,  —  assuming  the  other  factors  which  affect 
stabilization  (brassage,  adjustment,  influence,  lag)  to 
be  as  in  the  standard  case.  And  no  matter  how 
great  the  tendency  of  prices  to  vary,  almost  all  of  this 
tendency  can  be  eliminated  if  those  other  factors  are 
adapted  to  the  situation. 

Practically,  the  problem  is  to  secure  the  most  ideal 
adaptation  of  these  other  four  factors  to  the  tendency 
as  it  exists. 

The  tendency  (barring  extraordinary  times  such  as 
those  of  the  Great  War)  has  seldom  averaged  for  long 
more  than  4%  per  annum,  which  is  more  than  the 


Sec.  9,  G]  TECHNICAL  DETAILS  197 

average  rate  in  the  long,  and  almost  unprecedentedly 
rapid,  peace-time  movement  from  1896  to  1915. 

In  any  one  year  the  movement  seldom  reaches  12% 
or  an  average  of  1%  per  month.  In  the  whole  pre-war 
period,  1890-1915,  of  25  years  for  which  we  have  figures 
of  the  United  States  Bureau  of  Labor  Statistics  this 
happened  only  twice,  the  figures  then  being  13%  and 
14%. 

We  have  monthly  figures  beginning  only  with  1900. 
From  these  we  find  that,  beginning  with  January,  1900, 
and  taking  every  other  month  up  to  the  end  of  1915, 
the  successive  jumps  of  the  index  number  by  bi- 
monthly intervals  were  not  over  1%  in  two  cases  out 
of  three,  were  not  over  2%  in  nine  cases  out  of  ten, 
and  were  not  over  3%  in  31  cases  out  of  32. 

Our  problem,  as  already  stated,  is  how  best  to  deal 
with  such  a  tendency  by  selecting,  as  ideally  as  is  open 
to  us,  the  other  four  factors. 

First  consider  the  ideal  brassage.  This  is  scarcely 
capable  of  exact  formulation.  Evidently  3%  would 
permit  a  full  adjustment  in  almost  all  cases.  But,  as 
the  calculations  in  "  H  "  below  will  show,  even  a  1% 
brassage  will  be  adequate  for  all  practical  purposes  and 
other  calculations  which  I  have  made  show  that  there 
is  remarkably  little  difference  in  the  results  between 
1%,,  2%,  3%,  and  4%  brassages. 

To  fix  a  figure,  let  us  call  the  ideal  brassage  H%. 

The  ideal  adjustment  is,  evidently,  that  which  will 
tend  exactly  to  correct  the  deviation  on  which  it  is 
based,  thus  bringing  the  index  number  back  to  par 
(except  as  further  deviated  by  further  tendency,  and 
this  of  course  is  apt  to  be  in  either  direction). 

This  ideal  adjustment  depends  on  what  influence 
that  adjustment  has  on  the  index  number.  If  the  in- 
fluence is  less  than  in  the  standard  case  the  adjustment 
might  advantageously  be  greater  and  vice  versa.  For 
instance,  if  the  adjustment  is  2%  per  1%  of  deviation, 
this  will  just  correct  the  deviation  when  the  influence 
of  that  adjustment  is  i%  per  1%  of  adjustment.     For 


198  STABILIZING   THE   DOLLAR  [App.  I 

an  influence  of  ^%  per  1%  of  adjustment  (i.e.  of  1% 
per  2%  of  adjustment)  makes  an  influence  of  1%  per 
1%  of  deviation,  which  is  the  ideal. 

As  a  matter  of  fact  the  conditions  as  to  adjustment 
and  influence  assumed  in  the  standard  case  are,  doubt- 
less, approximately  true  to  life.  At  any  rate  if  the 
"  definite "  reserve  system  (described  in  Appendix 
I,  §  1,  B,  F)  and  the  method  of  regulating  the 
volume  of  bank  credit  (favored  in  Appendix  I,  §  7)  are 
adopted  so  that  the  entire  volume  of  circulating  media 
is  controlled  as  a  whole  in  direct  proportion  to  the  per- 
centage change  of  the  dollar,  a  1%  adjustment  in  the 
weight  of  the  dollar  would  have  a  1%  influence. 

Even  to  employ  the  "indefinite"  reserve  system 
would,  as  we  have  seen  in  Appendix  I,  §  1,  Z),  not  greatly 
change  the  situation,  unless  or  until  a  very  large  part 
of  the  world  adopted  that  system.  In  that  case  there 
would  be  some  advantage  in  increasing  the  adjustment 
to  li%  per  1%  of  deviation  or  even  to  2%,  the  exact 
ideal  figure  depending  on  the  results  of  an  investiga- 
tion of  the  repercussive  effect  of  adjusting  the  weight 
of  the  dollar  on  the  value  of  a  given  weight  of  gold.^ 

We  come  next  to  the  ideal  lag  relatively  to  the  adjust- 
ment interval ;  or,  to  express  it  in  more  practical  terms, 
the  ideal  length  of  the  adjustment  interval  relatively 
to  the  lag,  or  the  ideal  frequency  of  adjustment. 

As  we  have  seen,  the  ideal  frequency  is  not  the 
greatest  possible  frequency,  but  is  such  a  frequency  as 
will  make  the  interval  equal  to  the  lag. 

The  lag  for  Dun's  index  number  is  probably  about 
H  months.  The  lag  for  the  index  number  of  respon- 
sive commodities  described  in  Appendix  I,  §  3,  is  prob- 
ably less  than  1  month.  The  ideal  frequency  is 
therefore  probably  somewhere  between  a  fortnight 
and  a  month  and  a  half.  In  the  calculations  of  "H'' 
below  it  is  conservatively  taken  as  two  months. 

1  A  stiidy  of  this  sort  has  been  made  by  Professor  J.  M.  Clark 
in  his  able  paper  "Possible  Complications  of  the  Compensated 
Dollar,"  American  Economic  Review,  September,  1913,  pp.  576-588. 


Sec.  9,  H]  TECHNICAL  DETAILS  199 

The  influence  being  as  indicated,  the  adjustment 
should  evidently  be  1%  per  1%  deviation. 

It  will  be  seen  then,  that  (1)  the  tendency  is  beyond 
our  control ;  (2)  the  lag  measured  in  months  is  under 
control  only  to  a  small  extent  as  we  may  choose  the 
index  number  but,  measured  relatively  to  the  adjustment 
period,  is  fully  under  control ;  and  (3)  the  influence 
may  be  assumed  to  be  1%  per  1%  of  adjustment,  pro- 
vided we  have  a  proper  reserve  system  for  the  certifi- 
cates and  a  proper  banking  system  for  deposits  (as  ex- 
plained in  Appendix  I,  §  7). 

Practically,  therefore,  these  three  factors  (influence, 
absolute  lag,  and  tendency)  must  be  taken  as  we  find 
them  and  we  can  merely  choose  the  best  brassage,  ad- 
justment, and  frequency  of  adjustment. 

These  we  find  to  be,  in  round  numbers,  substantially 
those  of  the  standard  case. 

In  the  following  subsection  we  shall  see  what  the 
results  would  be  as  applied  to  the  historical  facts  since 
1900,  taking  the  brassage  as  1%  and  the  frequency  of 
adjustment  as  bi-monthly,  both  somewhat  more  con- 
servatively than  the  ideal. 

H.  The  Stabilization  Process  Applied  to  the  Actual 
Course  of  Prices. 

(a)   The  assumptions  suitable  for  practical  conditions. 

We  pass  now  from  the  highly  theoretical  calcula- 
tions just  given  to  the  practical  question  of  how  close 
to  par  the  actual  index  number  would  keep  under 
stabilization.  The  best  answer  can  probably  be  reached 
by  applying  the  same  sort  of  calculations  as  those 
above  to  the  actual  price  movements  experienced  since, 
say,  1900,  the  year  from  which  the  monthly  index 
number  of  the  United  States  Bureau  of  Labor  Statis- 
tics dates. 

We  shall  assume,  as  the  best  adjustment  period, 
two  months.  This,  as  has  been  observed,  is  more  than 
the  length  of  probable  lag  between  any  adjustment 
and  its  influence  on  the  price  level,  as  explained  in 
Appendix  I,  §3.     To  be  still  more  conservative,  how- 


200  STABILIZING   THE    DOLLAR  [App.  I 

ever,  we  shall  assume  that  only  two  thirds  of  the  in- 
fluence from  the  adjustment  is  felt  within  the  first 
adjustment  period  of  two  months  and  that  the  remain- 
ing third  is  felt  in  the  ensuing  period. 

We  shall  assume  the  brassage  to  be  1%.  Probably 
li%  or  possibly  2%  would  be  better,  but  the  above 
examples  and  various  other  calculations  applied  to 
the  actual  price  tendencies  in  the  period  mentioned 
show  substantially  the  same  degree  of  closeness  to 
par  under  brassage  charges  varying  from  1%  to  over 
4%. 

We  shall  assume  that  (except  where  limited  by  the 
brassage)  the  adjustment  of  the  dollar's  weight  is  1% 
for  every  1%  deviation  from  par  of  the  index  number, 
and  that  the  influence  of  this  on  the  index  number  is 
1%  for  each  1%  adjustment. 

These  assumptions  may  be  put  in  the  followdng  form : 

(1)  Brassage:  1%. 

(2)  Adjustment:  1%  for  each  1%  of  de\dation  from 
par  of  the  index  number  (subject  to  the  condition  that 
no  one  adjustment  shall  exceed  1%,  the  amount  of  the 
brassage) . 

(3)  Influence:  1%  for  each  1%  of  adjustment  in 
weight  of  the  dollar. 

(4)  Lag:  f  of  this  influence  felt  within  the  first 
adjustment  interval  of  two  months  and  the  remaining 
^  in  the  second  adjustment  interval. 

(5)  Tendency:  What  it  actually  was  according  to 
the  index  number  of  the  United  States  Bureau  of 
Labor  Statistics  between  1900  and  the  present. ^ 

Assumption  (5)  means  that,  instead  of  considering 
purely  hypothetical  cases,  we  are  now  to  study  what 
would  have  happened  if  we  had  had  stabilization 
started  January,  1900. 

This  affords  a  very  severe  test ;  for  the  period  taken 

1  Except  that,  beginning  with  January,  1913,  I  have  substituted 
the  special  index  number  of  responsive  commodities  described 
in  Appendix  I,  §  3.  The  difference  in  results  between  the  two 
index  numbers  is  not  great. 


Sec.  9,  H] 


TECHNICAL  DETAILS 


201 


is  one  of  unusual  variability  of  the  price  level  before 
the  war  (although  of  less  average  variability  than  the 
1%  every  two  months,  assumed  in  the  standard  hypo- 
thetical case). 

(b)  Calculation  of  stabilized  index  numbers.  The 
following  table  shows  the  first  stages  of  the  calcu- 
lation : 


I 

II 

III 

Influence  of 

Adjustment  of 

Dollar's 

Weight 

Stabilized 

Tendency 

1900 

(Percentage 

Index 

Two  Thirds  of 

One  Third  of 

Change  op 

Number i 

the  Influence 

the  Influence 

Actual   Index 

felt  in  First 

felt  in  Second 

Number) 

Following 

Following 

Interval 

Interval 

Jan.  1       ... 

100 

During  Jan.  and 

Feb.      .     .     . 

+  1.35 

Mar.  1     .     .     . 

101.35 

DuringMar.and 

Apr.      .     .     . 

-.67 

-  1.33 

May  1      .     .     . 

99.35 

During  Mayand 

June     .     .     . 

+  .43 

-.33 

-  1.88 

July  1       .     .     . 

97.57 

During  July  and 

Aug.     .     .     . 

+  .67 

+  .22 

-  .64 

Sept.  1     .     .     . 

97.82 

During       Sept. 

and  Oct.   .     . 

+  .67 

+  .33 

+  .92 

Etc. 

99.74 

1  This  column  also  shows  (by  subtracting  100)  the  deviation  from 
par,  and  the  adjustment  (except  that  this  is  limited  to  1%  by  the 
brassage). 


Let  US  follow  the  above  calculations  in  detail,  taking 
the  index  numbers  cited  from  the  bulletin  of  the  United 
States  Bureau  of  Labor  Statistics.  Changing  them  by 
simple  proportion  so  that  the  price  level  of  January, 
1900,  when  the  system  is  supposed  to  have  been  adopted, 


202 


STABILIZING   THE    DOLLAR 


[App.  I 


shall  be  100,  the  index  number  for  March  1,  1900,  is 
found  to  be  1.35%  above  this  par  of  January.  This 
is  the  signal  for  raising  the  weight  of  the  redemption 
bullion  1%,  since  the  brassage  will  not  permit  the  full 
increase  of  1.35%.  This  1%  increase  in  the  weight  of 
the  dollar,  by  assumption  (3),  affects  the  index  number 
by  1%.  Also,  by  assumption  (4),  f  of  this  influence 
is  felt  in  the  following  adjustment  interval  (ending 
May  1)  and  i  in  the  next  (ending  July  1). 

The  May  index  number  will  then  combine  the  effects 
of  the  I  of  1%  or  .67%  downward  influence  as  well  as 
of  the  downward  tendency  during  this  interval  which 
is  —1.33.  The  stabilized  figure  for  May  is,  therefore, 
101.35-.67-1.33,  or  99.35. 

This  figure  is  below  par,  and  calls,  in  turn,  for  a 
decrease  in  the  weight  of  the  dollar.  In  this  case, 
however,  the  brassage  limitation  does  not  come  into 
play.  The  deviation  is  —.65,  the  adjustment  —.65, 
and  the  influence  +.65  of  which  two  thirds,  or  +.43, 
follows  in  the  next  interval,  and  the  remaining  third, 
+  .22,  follows  in  the  interval  next  but  one.  The  July 
stabilized  index  number  is  found  from  that  of  May  as 
follows:  99.35 +  .43 -.33 -1.88  =  97.57. 

The  stabilized  and  unstabilized  index  numbers  are : 


Jan.  1 
Mar.  1 

May  1 
July  1 
Etc. 


Unstabilized 


100.00 

101.35 

100.00 

98.11 


Stabilized 


100.00 

101.35 

99.35 

97.57 


Figure  12  gives,  for  comparison,  the  curves  from 
1900  to  1918  for  this  stabilized  index  number  and  for 
the  actual  course  of  prices  in  that  period. 

Except  for  the  period  when  the  war  begins  (as  it  does 
at  the  close  of  1915)  to  produce  a  great  effect  on  the 


Sec.  9,  H]  TECHNICAL  DETAILS  203 

price  level,  stabilization  works  almost  perfectly/  keeping 
the  index  number  within  2%  of  the  original  par  during 
two  thirds  of  the  time,  within  3%  of  par  six  sevenths 
of  the  time,  and  within  4%  all  of  the  time.^  During 
this  same  period,  on  the  other  hand,  the  unstabilized 
index  number  wandered  from  the  starting  point  30%. 

Beginning  with  the  fall  of  1915,  however,  the  up- 
ward tendency  becomes  too  strong  and,  in  spite  of  the 
stabilization  mechanism,  the  stabilized  price  level  rises 
in  the  diagram  86%  above  par.  This,  of  course,  is  a 
small  rise  as  compared  with  the  rise  which  actually 
occurred,  as  the  index  number  rose  200%  above  the 
original  starting  point. 

The  deviation  from  par  of  the  stabilized  index  num- 
ber would  be  slightly  less  if  the  brassage  were  2% 
and  less  still  if  it  were  3%,  etc.  Yet  I  doubt  whether 
the  brassage  should  be  increased  much,  if  any,  above 
1%,  (1)  because  presumably  we  do  not  now  need  to 
provide  against  a  contingency  so  remote  as  a  repetition 
of  such  a  situation  as  that  caused  by  the  Great  War, 
and  (2)  because,  if  another  such  situation  should 
develop,  a  partial  stabilization  is  the  most  we  could 
expect.  The  fiscal  necessity  of  the  Government  is 
then  so  paramount  a  necessity  that  inflation  is  prob- 
ably unavoidable.  If  the  Government  itself  succeeds 
in  avoiding  direct  inflation,  the  people,  in  subscribing 
to  bonds  by  borrowed  money,  will  bring  about  an  in- 
direct inflation. 

^  It  should  be  remembered  that  this  stabilization  of  wholesale 
prices  would  carry  with  it  the  stabilization  of  retail  prices  as  ex- 
plained in  Appendix  I,  §  3.  In  fact,  as  retail  prices  change  slug- 
gishly, their  index  number  would  doubtless  keep  even  closer  to  par 
than  that  of  wholesale  prices. 

-  This  close  conformity  to  par  is  maintained  in  spite  of  the  fact 
that,  as  already  noted,  the  "lag"  assumed  is  much  greater  than  we 
may  reasonably  believe  is  the  truth.  In  fact  the  conformity  would 
be  close  even  if  the  lag  were  much  longer.  Assuming  that  the 
influence  of  each  adjustment  came  even  a  full  year  later,  the  index 
number  would  (up  to  the  close  of  1915  when  the  great  influence 
from  the  war  began)  keep  within  3  %  of  par  half  of  the  time,  within 
5%  two  thirds  of  the  time,  and  wathiu  10%  nineteen  twentieths 
of  the  time. 


204 


STABILIZING   THE    DOLLAR 


[App.  I 


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Sec.  10]  TECHNICAL  DETAILS  205 

Of  course  the  foregoing  figures  do  not  pretend  to 
give,  with  absolute  exactness,  what  would  have  hap- 
pened under  stabilization,  for  the  reason  that  the  five 
hypotheses  do  not  state  the  exact  conditions  which 
would  obtain.  Thus  the  tendency  is  of  course  ever 
changing.  The  influence  of  the  adjustment  in  weight 
of  the  dollar  would  doubtless  be  distributed  somewhat 
differently  from  the  distribution  assumed  in  the  figures. 
But  the  stabilization  process,  by  its  very  nature,  adapts 
itself  to  whatever  situation  is  presented  and  relent- 
lessly pursues  and  ultimately  eliminates  each  deviation 
as  it  occurs.  The  figures  give  us  as  good  a  picture  as 
we  can  secure,  until  the  actual  plan  is  inaugurated,  of 
what  the  general  behavior  of  the  index  number  would  be. 

This  behavior  would  usually  be  very  stable.  For 
to  keep  the  price  level  within  two  or  three  per  cent  of 
par  as  is  here  done,  is,  for  all  practical  purposes,  to  keep 
it  perfectly  stable.  The  only  evils  of  instability  which 
are  really  felt  are  the  cumulative  evils  of  a  long  sus- 
tained rise  or  fall.  In  particular,  as  we  have  seen, 
demonstrations  of  popular  unrest,  like  populism  during 
falling  prices  and  I.  W.  W.ism  during  rising  prices, 
develop  only  after  the  fall  or  rise  has  proceeded  both 
long  and  far ;  and  this  could  not  happen  with  the  price 
level  closely  tethered  to  par. 

10.   A  Tentative   Draft  of   an   Act   to   Stabilize   the 

Dollar 

Be  it  enacted  by  the  Senate  and  House  of  Represent- 
atives of  the  United  States  of  America  in  Congress 
assembled : 

(Replacement  of  Unstable,  by  Stable  Dollar) 

Sec.  1.  That  at  three  o'clock.  Eastern  time,  in  the 
morning  of  January  1,  1921,  the  gold  dollar  of  the 
United  States  shall  cease  to  be  a  constant  quantity 
of  gold  of  variable  purchasing  power,  and  thereafter 
shall   be   a   variable   quantity   of   standard  gold  bul- 


206  STABILIZING   THE    DOLLAR  [App.  I 

lion  of  approximately  constant  computed  purchasing 
power. 

Said  quantity  of  standard  gold  bullion,  constituting 
a  gold  dollar  at  any  given  time,  shall  be  ascertained 
and  fixed,  from  time  to  time,  by  the  computation  and 
use  of  index  numbers  of  wholesale  prices  as  hereinafter 
set  forth. 

Provided:  That  the  gold  dollar  shall  remain  25.8 
grains  of  standard  gold  until  some  other  quantity  is 
fixed  under  this  Act. 

{Computation  of  Index  Number  and  Its  Deviation 

from  Par) 

Sec.  2.  That  for  the  purpose  of  computing  approxi- 
mately the  fluctuations  of  various  wholesale  prices  in 
the  United  States  after  the  year  1920,  and  of  comput- 
ing index  numbers  such  as  will  approximately  measure 
the  average  of  such  fluctuations,  and  of  computing 
therefrom  the  approximate  fluctuations  in  the  purchas- 
ing power  of  gold,  the  Bureau  of  Standards  (or  Bureau 
of  Labor  Statistics)  hereinafter  referred  to  as  the  Com- 
puting Bureau,  shall  proceed  as  follows  : 

(a)  From  the  list  of  commodities  and  the  quantities 
thereof  marketed  at  wholesale  in  the  United  States  in 
1909,  heretofore  compiled  by  the  Bureau  of  Labor 
Statistics  from  data  of  the  Census  of  1910  and  other 
data  and  published  in  Bulletin  No.  181,  Wholesale 
Prices  Series  No.  4,  the  Computing  Bureau  shall, 
immediately  after  the  passage  of  this  Act,  make  up  a 
list  of  selected  commodities  comprising  about  100  com- 
modities (not  less  than  75  nor  more  than  125)  deemed 
by  it  to  be  the  most  suitable  (as  to  importance  and 
otherwise)  to  be  used  for  computing  the  said  index 
number. 

(6)  Immediately  after  December  25,  1920,  the  Com- 
puting Bureau  shall  compute,  from  the  best  accessible 
data,  the  average  price  of  each  of  these  commodities 
for  the  year  1920  (to  December  25). 


Sec.  10]  TECHNICAL  DETAILS  207 

(c)  From  the  several  average  prices,  so  computed  for 
1920,  and  the  quantities  so  hsted  for  1909  by  the 
Bureau  of  Labor  Statistics,  the  Computing  Bureau  shall 
compute  an  ideal  composite  "goods-dollar"  for  refer- 
ence purposes  consisting  of  such  quantities  of  the  sev- 
eral selected  commodities,  proportional  to  the  quantities 
so  listed  by  the  Bureau  of  Labor  Statistics,  that  their 
aggregate  value,  at  the  average  prices  so  computed  for 
1920,  shall  equal  one  hundred  cents.  (This  selection 
of  the  price  level  of  1920  as  the  base  or  par  is,  of  course, 
merely  illustrative.     See  Appendix  I,  §4.) 

(d)  From  average  wholesale  prices  computed  from 
price  quotations  taken  on  the  first  Wednesday  (or,  if 
that  day  be  a  holiday,  the  next  business  day)  of  the 
months  January,  March,  May,  July,  September,  No- 
vember of  1921  and  each  year  thereafter,  the  Computing 
Bureau  shall  speedily  compute  the  value,  in  cents,  of 
the  composite  "  goods-dollar,"  and  such  value  in  cents 
shall  be  the  index  number  of  prices  for  that  date. 

(e)  The  Computing  Bureau  shall  compute  the  devi- 
ation from  par  of  such  index  number  by  subtracting 
one  hundred  cents  from  said  index  number.  Thus 
if  the  index  number  is  $1.01  the  deviation  is  1  cent  or 
1%  above  par,  and  if  the  index  number  is  $0.98  the 
deviation  is  2  cents  or  2%  below  par. 

( Transmission  Thereof  to  Bureau  of  the  Mint) 

Sec.  3.  The  index  number,  deviation  percentage, 
and  all  the  data  from  which  they  are  computed  shall 
(unless  delayed  by  unavoidable  causes)  be  transmitted 
by  the  Computing  Bureau  to  the  Bureau  of  the  Mint, 
within  one  week  from  the  day  to  which  the  data  relate. 

{Calculation  of  the  Correction  of  the  Dollar's  Weight) 

Sec.  4.  That  the  Bureau  of  the  Mint,  upon  receipt 
from  the  Computing  Bureau  of  such  percentage  devi- 
ation, shall  forthwith  calculate  a  percentage  correction 
or  adjustment  to  be  added  to,  or  subtracted  from,  the 


208  STABILIZING   THE    DOLLAR  [App.  I 

then  weight  of  the  dollar.  Said  adjustment  (pro- 
vided it  shall  never  exceed  the  "  brassage  "  charge  of 
1%  described  below)  shall  be  equal  to  the  percentage 
deviation. 

(Proclamation  Thereof) 

Sec.  5.  The  Bureau  of  the  Mint  shall  then  forth- 
with give  public  notice  that,  on  and  after  the  day  next 
following  such  notice,  and  until  changed  by  further  like 
notice  under  this  Act,  the  number  of  grains  of  standard 
gold  so  computed  shall  constitute  the  gold  dollar  of 
the  United  States  ;  and  thereupon  the  number  of  grains 
of  standard  gold  in  the  gold  dollar  of  the  United  States 
shall  be  fixed  as  prescribed  in  such  notice. 

(Unrestricted  Issue  of  Certificates  for 
Gold  (Free  Coinage)) 

Sec.  6.  That  after  December  31,  1920,  the  Bureau 
of  the  Mint  shall  receive,  subject  to  a  "  brassage 
charge  "  of  one  per  cent  and  subject  to  such  conditions 
and  limitations  as  are  now  provided  by  law  touching 
the  receipt  of  gold  bullion  to  be  coined,  all  gold  bullion 
offered  to  it  and  shall  pay  for  the  same  with  "  gold 
bullion  dollar  certificates "  described  hereinafter  at 
the  rate  of  one  dollar  for  the  number  of  grains  of  stand- 
ard gold  in  the  dollar  as  then  last  fixed  by  or  under 
this  Act  and  (as  to  any  balance  less  than  one  hundred 
dollars)  in  lawful  money. 

( Unrestricted  Redemption  of  Certificates  in  Gold) 

Sec.  7.  That  after  December  31,  1920,  the  Mint 
Bureau  shall  receive  all  gold  bullion  dollar  certificates 
tendered  to  it  and  shall  forthwith  pay  for  the  same, 
dollar  for  dollar,  in  standard  gold  bars  at  the  rate  of 
one  dollar  for  the  number  of  grains  of  standard  gold 
in  the  gold  dollar  of  the  United  States  (as  fixed  by  or 
under  this  Act  for  the  time  of  such  receipt)  and  (as 
to  any  balance  less  than  five  ounces  of  standard  gold) 
in  lawful  money. 


Sec.  10]  TECHNICAL  DETAILS  209 

(Details) 

(Conversion  of  Coin  into  Bullion) 

Sec.  8.  That  after  the  passage  of  this  act  no  gold 
coin  shall  be  struck  by  the  United  States.  The  Secre- 
tary of  the  Treasury  shall  provide,  by  rules  and  regu- 
lations to  be  issued  within  three  months  after  the 
passage  of  this  act,  for  the  conversion  before  January 
1,  1921,  of  gold  coin  of  the  United  States  owned  or 
acquired  by  the  United  States  into  bars  of  standard 
gold  each  containing  not  less  than  five  ounces,  and  for 
like  prompt  conversion  of  all  like  gold  coin  thereafter 
acquired  by  the  United  States. 

{To  facilitate  the  withdrawal  of  gold  coin  from  circulation 
into  the  Treasury  through  the  Federal  Reserve  and 
National  Banks) 

Provided :  That  the  United  States,  under  such  rules 
and  regulations  as  the  said  Secretary  may  prescribe, 
shall  receive  all  standard  gold  coin  of  the  United  States 
offered  to  it  and  pay  for  the  same  in  lawful  money  at 
the  rate  of  ten  dollars  and  one  cent  of  lawful  money  for 
every  ten  dollars  of  standard  gold  coin  so  offered  from  the 
date  of  this  act  to  December  31,  1920,  inclusive,  and  at 
the  rate  of  one  dollar  for  every  dollar  of  standard  gold 
coin  offered  to  it  thereafter.  Such  payment  shall 
be  made  in  the  gold  bullion  dollar  certificates  herein 
authorized  and  (as  to  any  balance  less  than  one  hun- 
dred dollars)  in  lawful  money. 

(Conversion  of  Old  Certificates  into  New) 

Sec.  9.  That  within  three  months  after  the  passage 
of  this  act  the  preparation,  issue,  and  paying  out  by 
the  United  States  of  present  gold  coin  certificates  shall 
cease.  For  all  gold  coin  certificates  then  owned  or 
thereafter  acquired  by  the  United  States  there  shall  be 
substituted,  dollar  for  dollar,  gold  bullion  dollar  cer- 
tificates certifying  that 


210  STABILIZING   THE    DOLLAR  [App.  I 

"  the  United  States  of  America  will  pay  the  bearer 
on  demand  $100  in  standard  gold  bars  of  not  less  than 
5  ounces  each  and  any  smaller  balance  in  any  lawful 
money." 

Upon  such  substitution  such  gold  coin  certificates  shall 
be  destroyed. 

(To  accelerate  said  correction  at  the  start  especially  through 
the  Federal  Reserve  and  National  Banks) 

Provided:  That  the  United  States,  under  rules  and 
regulations  to  be  prescribed  by  the  Secretary  of  the 
Treasury,  shall  receive  all  gold  coin  certificates  offered 
to  it  and  pay  for  the  same  in  lawful  money  at  the  rate 
of  ten  dollars  and  one  cent  of  lawful  money  for  every  ten 
dollars  of  gold  certificates  so  offered  from  the  date  when 
their  issue  ceases  to  December  31, 1920,  inclusive,  and  at 
the  rate  of  one  dollar  of  lawful  money  for  every  dollar 
of  such  certificates  so  offered  after  December  31, 1920. 

{Government  Gold  "  Reserve  "  and  "  Surplus  ") 

Sec.  10.  That  the  Secretary  of  the  Treasury  shall 
divide  all  the  gold  against  which  gold  coin  certificates 
and  gold  bullion  dollar  certificates  are  outstanding  at 
3  A.M.  January  1,  1921,  into  two  parts,  one  part  to  be 
known  as  the  "  reserve "  against  outstanding  gold 
bullion  dollar  certificates  and  equal  to  50%  of  the 
value  of  the  gold  certificates  then  outstanding  and  the 
remaining  part  to  be  known  as  the  "  surplus,"  in  excess 
of  said  reserve. 

This  remainder  or  "  surplus "  shall  be  forthwith 
transferred  to  the  general  fund  of  the  Treasury  as  the 
initial  profits  of  the  new  system. 

The  "  reserve  "  shall  be  maintained  daily,  as  nearly 
as  possible  at  50%  of  the  gold  bulUon  dollar  certificates 
outstanding  from  time  to  time. 

If,  on  any  date,  the  reserve  falls  short  of  50% 
it  is  to  be  restored  by  withdrawing  from  circulation 
and  cancelling  gold  bullion  dollar  certificates. 


Sec.  10]  TECHNICAL  DETAILS  211 

If,  on  any  date,  the  reserve  exceeds  said  50%  it  is  to 
be  restored  by  issuing,  and  putting  into  circulation, 
the  requisite  number  of  new  gold  buUion  dollar  cer- 
tificates. 

The  Secretary  of  the  Treasury  is  authorized  to  make 
said  withdrawals  of  certificates  from  circulation  by 
withdrawing  from  the  Government  deposits  in  National 
Banks,  and  to  issue  certificates  and  place  them  in 
circulation  by  adding  to  those  deposits. 

{Certificates  Available  for  Bank  Reserves) 

Sec.  11.  That  all  provisions  of  existing  banking  laws 
of  the  United  States  regulating  the  holding  of  gold 
reserves,  including  reserves  of  any  Federal  Reserve 
Bank,  National  Bank,  or  other  bank,  shall  be  deemed 
to  be  satisfied  by  such  holding  of  gold  bullion  dollar 
certificates. 

{Legal  Tender) 

Sec.  12.  (a)  That  gold  coin  of  the  United  States 
shall  not  be  a  legal  tender  in  payment  of  debts  falhng 
due  after  December  31,  1920. 

(6)  That  all  debts,  public  and  private,  falling  due 
after  December  31,  1920,  including  debts  theretofore 
created  and  expressed  in  dollars  of  ''  gold  coin  of  the 
present  standard  of  weight  and  fineness,"  or  expressed 
in  words  of  like  import,  shall  be  payable  in  standard 
gold  bars  at  the  rate  in  grains  per  dollar  fixed  by  or 
under  this  Act  for  the  time  when  each  debt  falls  due, 
and  the  balance,  if  any,  less  than  five  ounces,  in  lawful 
money.  Such  standard  bars  shall  be  lawful  money  and 
a  legal  tender  for  this  purpose. 

{Publicity) 

Sec.  13.  The  Computing  Bureau  shall,  as  promptly 
as  possible,  make  pubUc  in  suitable  pubHc  documents 
all  the  pertinent  facts  and  figures  concerning  the  calcu- 
lation of  the  index  number  and  its  percentage  deviation 


212  STABILIZING   THE    DOLLAR  [App.  I 

from  par,  including  the  market  quotations  for  the  con- 
stituent commodities.  The  Mint  Bureau  shall  likewise 
make  pubhc  its  findings  as  to  the  adjustment  of  the 
dollar's  weight. 

(Financing  the  Administration  of  This  Act) 

Sec.  14.  That  a  sum  equal  to  the  initial  profit  as 
defined  in  Sec.  10,  or  so  much  thereof  as  may  be  neces- 
sary, is  hereby  appropriated  and  is  made  available  until 
expended  as  the  Secretary  of  the  Treasury  shall  direct 
for  all  expenses  necessary  for  the  administration  of 
this  Act ;  and  the  Secretary  of  the  Treasury  is  author- 
ized to  use  the  receipts  from  time  to  time  from  the 
"  brassage  charge  "  as  defined  in  Sec.  6,  for  the  same 
purpose. 

(Future  Revisions  of  Index  Numbers) 

Sec.  15.  That  immediately  after  the  data  of  the 
census  of  1920,  and  other  subsequent  censuses  respect- 
ively, are  available,  the  Computing  Bureau,  from  such 
data  and  the  best  other  available  data,  shall  revise  the 
Ust  of  selected  commodities  and  designate  a  revised 
composite  ''  goods-dollar  "by  the  same  method  as 
hereinbefore  described  and  such  that,  at  the  moment 
of  revision,  the  value  of  the  new  or  revised  goods- 
dollar  shall  be  equal  to  that  of  the  old. 

(Penal  Code  Amendment) 

Sec.  16.  That  Section  147  of  the  Penal  Code  approved 
Mar.  4,  1909,  defining  ''obligation  or  other  security 
of  the  United  States  "  is  hereby  amended  to  include 
the  gold  bulHon  dollar  certificates  hereby  authorized. 

(Repeal  of  Former  Acts) 

Sec.  17.  That  all  Acts  and  parts  of  Acts  inconsist- 
ent with  this  Act  are  hereby  repealed. 


Sec.  10]  TECHNICAL  DETAILS  213 

The  above  Act  assumes  that  a  reasonable  banking 
system,  such  as  our  Federal  Reserve  System,  already 
exists  under  which  deposits  subject  to  check  will  be 
kept  in  some  reasonable  relation  to  bank  reserves. 

The  Federal  Reserve  Board  could  assist  in  the  prompt 
and  efficient  operation  of  the  new  system  by  having 
due  regard  to  the  rise  and  fall  of  the  Index  Number, 
as  suggested  by  Mr.  Paul  Warburg.  This  would  help 
its  adjustment  of  the  rate  of  discount  and  its  general 
loan  policy  to  be  such  as  to  keep  the  volume  of  indi- 
vidual deposits  subject  to  check  approximately  propor- 
tional both  to  bank  reserves  and  to  the  Government 
gold  reserve  against  gold  bullion  dollar  certificates. 


APPENDIX   II 

DISAPPROVAL   OF   THE    PLAN 

I.   Misunderstandings 

A.  Introduction.  Some  readers  will  wish  to  know 
what  objections  have  been  found  or  alleged  against 
stabilizing  the  dollar. 

The  chief  of  these  have  already  been  disposed  of  in 
the  text.  The  other  objections  are  to  be  found, 
stated  in  the  objectors'  own  language,  in  articles  cited 
in  the  bibliography  of  Appendix  V.  Answers  by  me  or 
other  writers  are  cited  in  the  same  bibliography.^ 

Nevertheless  it  seems  desirable,  in  order  to  make  this 
book  complete,  to  renew  the  arguments  here.  I  shall 
therefore  state  and  answer  the  alleged  objections  as  fully 
as  space  permits.  If  difficulties  still  remain  in  any 
reader's  mind,  I  hope  he  will  do  me  the  favor  of  com- 
municating with  me  to  the  end  that  I  may,  if  possible, 
clear  them  up  by  correspondence. 

I  shall  try  to  treat  seriously  and  on  its  real  merits 
each  objection  which  has  been  offered  and  to  show  how, 
in  every  case,  the  objection  falls  to  the  ground. 

Most  of  the  alleged  objections  turn  out,  on  exami- 
nation, to  be  mere  misunderstandings.  Of  the  remain- 
ing objections,  most  consist,  at  bottom,  of  unreasonable 
hostility,  due  to  prejudice  and  fear  of  disturbing  the 
status  quo.  The  few  objections  still  remaining  amount 
simply  to  emphasizing  the  fact  that  the  plan  does  not 
attain  an  ideally  perfect  standard  of  value. 

^  See  especially  my  answers  to  objections  in  the  New  York  Times, 
December  22,  1912,  and  "Objections  to  a  Compensated  Dollar 
Answered,"  American  Economic  Review,  December,  1914. 

214 


Sec.  1,  D]  DISAPPROVAL  OF  THE   PLAN  215 

In  this  section  I  shall  consider  the  misunderstand- 
ings. 

B.  "  The  plan  only  corrects  those  deviations  in  the 
purchasing  power  of  the  dollar  which  are  due  to  gold 
causes/'  and  not  those  due,  for  instance,  to  causes  con- 
nected with  credit  or  commodities.  On  the  contrary, 
it  corrects  all  deviations  indiscriminately.  The  crite- 
rion is  the  index  number,  and  the  plan  operates  against 
any  deviation  from  par  of  the  index  number  whether 
that  deviation  is  due  to  gold  or  to  any  other  cause 
whatsoever.  1  The  reason,  of  course,  is  that  all  dollars 
are  interconvertible  so  that  if  the  value  of  the  gold 
dollar  is  kept  constant,  that  of  every  other  dollar  must 
be  constant  also. 

C.  "It  assumes  '  the  gold  theory  '  —  that  high  prices 
are  due  to  the  abundance  of  gold.''  No ;  it  merely 
assumes  that  the  purchasing  power  of  gold  does  change 
relatively  to  commodities.  It  does  not  assume  any 
particular  cause  of  these  changes.  Gold  depreciation 
relatively  to  commodities  may  be  due,  for  instance, 
to  scarcity  of  commodities ;  it  may  be  due  to  the  in- 
flation of  money  other  than  gold,  circulating  alongside 
of  gold,  such  as  silver  and  paper  money ;  it  may  be  due 
to  credit  inflation  ;  or  it  may  be  due  to  causes  speeding 
up  the  velocities  of  circulation  of  money  and  credit. 

D.  "It  assumes  the  quantity  theory  of  money."  The 
impression  that  the  plan  is  dependent  on  acceptance  of 
the  quantity  theory  of  money  is  presumably  due  to  the 
fact  that  I  have  espoused  that  theory  (in  a  modified 
form)  in  my  Purchasing  Power  of  Money.  But  there  is 
nothing  in  the  plan  itself  which  could  not  be  accepted 
equally  well  by  those  who  reject  the  quantity  theory 
altogether.  On  the  contrary,  as  one  opponent  of  the 
quantity  theory  has  pointed  out,  the  plan  should  seem 
even  simpler  to  those  who  do  not  accept  the  quantity 
theory  but  believe  that  a  direct  relationship  exists  be- 
tween the  purchasing  power  of  the  dollar  and  the 

^  As  to  credit  in  particular  see  Appendix  1,  §  7. 


216  STABILIZING   THE    DOLLAR  [App.  II 

bullion  from  which  it  is  made,  than  to  believers  in  the 
quantity  theory. 

It  will  be  clear  to  any  one  who  follows  the  reasoning 
and  explanations  in  this  book/  that  the  only  money 
theory  assumed  is  that  common  to  all  theories,  and 
accepted  universally ;  namely,  that  a  large  quantity  of 
gold  will  buy  more  goods  than  a  small  quantity  —  a 
pound,  than  an  ounce,  for  instance  —  and  that  an  in- 
crease of  the  gold  in  a  dollar  will,  somehow,  increase 
the  dollar's  purchasing  power.  As  to  the  exact  process 
by  which  this  acknowledged  result  is  attained  we  need 
have  no  concern. 

Personally,  like  the  great  majority  of  economists,  I 
believe  that  this  process  is  through  the  fact  that  in- 
creasing the  weight  of  a  dollar  decreases  the  number  of 
dollars  in  circulation  (not  only  of  gold  but  of  fiduciary 
money  and  bank  credit).  But  any  one  who  reasons 
on  some  other  theory  cannot  avoid  reaching  the  same 
result ;  namely,  that  the  plan  would  work,  provided,  as 
I  have  said,  he  admits  simply  that  the  heavier  the 
dollar  the  more  valuable  it  is. 

To  take  an  example  cited  in  Chapter  IV,  if  the 
Mexicans  should  change  the  weight  of  their  dollar 
to  the  weight  of  ours,  the  price  of  wheat  and  other 
things  would  become  about  the  same  on  both  sides 
of  the  Rio  Grande,  just  as  they  are  at  present  (ex- 
cept for  the  tariff)  the  same  on  both  sides  of  the 
Canadian  border  where  the  dollar  is  of  the  same 
weight  on  both  sides. 

E.  "It  contradicts  the  quantity  theory.'^  This  ob- 
jection, the  opposite  of  the  last,  has  been  raised  by 
some  who  believe  in  the  quantity  theory  but  imagine 
that  the  operation  of  the  plan  could  not  affect  the 
quantity  of  money  at  all  or  not  in  the  degree  needed. 
But,  as  explained  in  the  text  (Chapter  IV,  §  9,  and 
Appendix  I,  §9),  it  is  not  assumed  that  a  1%  change 
in  the  weight  of  the  gold  dollar  will  necessarily  affect 

1  See  Chapter  IV,  §§  4-9. 


Sec.  1,  F]  DISAPPROVAL  OF  THE   PLAN  217 

either  the  quantity  of  money  or  the  price  level  by 
exactly  1%.  It  is  only  necessary  to  assume  that  it 
works  in  the  right  direction  and  that,  if  the  first  ad- 
justment proves  insufficient,  its  insufficiency  will  be 
registered  in  later  index  numbers  and,  in  consequence, 
it  will  be  reenforced  by  subsequent  adjustments  as 
required. 

That  a  change  in  the  weight  of  the  dollar  will  change 
the  number  of  dollars  has  been  made  evident  already. 
It  will  affect  the  number  of  gold  dollar  certificates 
(see  Chapter  IV,  §  7,  and  Appendix  I,  §  1)  and  the  num- 
ber of  dollars  of  circulating  credit  (see  Appendix  I,  §  7). 

F.  "It  aims  to  fix  all  prices  J  ^  On  the  contrary,  it 
does  not  aim  to  fix  any  price,  except  the  price  of  gold 
which  is  already  fixed  —  though  wrongly  so  —  in 
our  present  system.  The  prices  of  wheat  and  sugar 
and  everything  else  would  be  as  free  as  now  to  vary 
relatively  to  the  general  level  and  to  each  other.  The 
adjustment  of  the  dollar  would  control  only  the  scale 
or  "  level  "  of  commodity  prices  and  not  interfere 
with  the  freedom  of  their  relative  movements. 

Only  the  general  level  is  fixed,  a  rise  in  one  com- 
modity being  balanced  by  a  fall  in  others.  A  fixed 
sea  level  does  not  prevent  wave  motions. 

As  Tread  well  Cleveland,  editor  of  the  Newark  Even- 
ing Neivs,  well  says,  "  the  aim  is  by  no  means  to 
freeze  all  ratios  of  exchange  fast  "or  to  compel  all 
prices  in  dollars  to  be  ''  petrified  into  everlasting  im- 
mobility." 

The  upper  curve  of  Figure  13  shows  the  actual 
market  price  of  wheat  in  terms  of  gold  in  contrast  with 
the  middle  curve  which  shows  the  price  of  wheat  as  it 
would  have  been  under  stabilization,  i.e.  its  price  in 
terms  of  the  commodity  standard.  The  lower  curve 
shows  the  course  of  the  general  price  level  in  terms  of 
gold.  The  middle  curve  exhibits  abundant  freedom  to 
fluctuate,  the  fluctuations  being  due  to  harvests  and 
other  conditions  connected  with  the  production  of  this 
specific  commodity,  wheat.     The  upper  curve  shows 


218 


STABILIZING   THE    DOLLAR 


[App.  II 


these  same  fluctuations  ;  but  it  shows  also  other  fluctua- 
tions, mostly  upward,  due  to  the  movement  in  general 
prices,  which  means   the   opposite  movement  of  the 


I    ^    §;    ^    ,^    §    ^    S    ^    .§    ^    5^    ;^    ^ 


^ 


^ 


^ 


Fig.  13.     The  Price  of  Wheat  in  Terms  of  Gold  and  in  Terms  of 

Commodities 

The  curve  for  "  wheat  in  gold  "  represents  the  movement  of  the  actual 

market  price  of  wheat. 

The  curve  for  "  wheat  in  commodities  "  is  the  same  as  that  in  Figure  11 

and  represents  the  real  purchasing  power  of  wheat. 

The  curve  for  "  all  commodities  "  is  repeated  from  Figure  10.     We  may 

Bay  that  the  upper  curve  is  a  compound  of  the  other  two,  the  lower  curve 

containing  the  monetary  element  and  the  middle  curve  the  wheat  element. 

The  year  to  year  fluctuations  in  the  price  of  wheat  seem  to  be  due  chiefly 

to  wheat,  while  the  general  upward  trend  is  chiefly  due  to  money. 

The  middle  curve  shows  how  the  price  of  wheat  would  behave  if  the  dollar 

were  stabilized.     This  price  would  fluctuate  almost  as  much  as  it  does  now. 


dollar.  The  upper  curve  is  compounded,  as  it  were,  of 
the  two  lower  curves,  one  representing  changes  in 
wheat,  the  other  representing  changes  in  the  purchasing 
power  of  the  dollar. 


Sec.  1,  G]  DISAPPROVAL  OF  THE  PLAN  219 

G.  "It  would  interfere  with  supply  and  demand." 
Rather  would  it  simply  disentangle  the  supply  and 
demand  of,  say,  wheat,  from  the  supply  and  demand 
of  the  money  medium.  As  things  are  now  the  price 
of  wheat  always  includes,  besides  the  effects  of  the 
supply  and  demand  of  wheat,  the  effects  of  the  supply 
and  demand  of  gold,  of  credit,  etc. 

A  study  of  the  two  curves  of  Figure  13  shows  how 
the  two  sets  of  phenomena  are  now  entangled  as  well  as 
how  natural  is  the  error  of  overlooking  the  money 
ingredient  in  the  price  of  wheat.  In  their  year-to- 
year  changes  the  two  curves  agree  in  moving  up  to- 
gether or  down  together  in  24  cases  out  of  26  !  A 
wheat  merchant  could  doubtless  see,  for  each  of  these 
24  changes,  a  definite  reason  in  the  wheat  market,  with- 
out any  apparent  need  to  invoke  the  monetary  ele- 
ment. He  would  be  able  to  say  that  between  1914 
and  1915,  for  instance,  the  price  of  wheat  rose  rapidly 
because  of  certain  specific  war  conditions  affecting 
wheat.  And  he  would  be  substantially  right  quali- 
tatively. Only  a  quantitative  analysis  such  as  Figure 
13  gives  could  disclose  the  fact  that  of  the  27%  rise, 
only  25%  was  due  to  the  causes  he  saw  and  2%  was 
due  to  the  depreciation  of  the  dollar. 

Under  a  stabilization  system  the  price  of  wheat 
would  have  gone  up  25%  as  in  the  middle  curve.  The 
supply  and  demand  of  wheat  would  not  be  inter- 
fered with  but  simply  separated  from  monetary 
fluctuations  which  would  be  registered  in  the  price  of 
gold. 

Under  our  present  system,  the  price  of  gold  is  cut 
off  from  the  operation  of  supply  and  demand  alto- 
gether. If  gold  were  as  plentiful  as  the  pebbles  on 
the  beach,  its  price  would,  under  the  present  arbitrary 
system,  remain  immovable  at  $20.67  an  ounce  ! 

This  fixity  of  the  price  of  gold  might  itself  be  called 
an  arbitrary  interference  with  natural  supply  and  de- 
mand, as  was  indicated  in  Chapter  V,  §  3.  Were  the 
natural  law  of  supply  and  demand  allowed  to  take  its 


220  STABILIZING   THE   DOLLAR  [App.  II 

course  and  not  artificially  restrained,  the  changes  in  the 
supply  of,  and  demand  for,  gold  and  its  substitutes 
would  make  themselves  felt  in  the  price  of  gold,  and 
not  in  the  prices  of  goods,  as  at  present  they  are  forced 
to  do. 

H.  ''It  is  a  plan  to  control  the  value  of  gold.'^  The 
valorization  of  coffee  in  Brazil,  or  the  valorization 
of  silver  as  proposed  by  some  "  friends  of  silver," 
has  nothing  in  common  with  the  plan  here  proposed. 
The  latter  plan  does  not  attempt  to  impound  gold. 
It  does  not  attempt  anything  so  colossal  or  useless 
as  to  raise  the  value  of  gold  by  cornering  and  stor- 
ing it  or  by  any  other  means.  It  does  not  aim  to 
affect  at  all  the  value  of  gold  per  ounce,  but  aims 
simply  to  change  the  quantity  of  it  in  a  dollar.  It  is 
the  dollar,  not  gold,  which  we  are  trying  to  stabilize. 
The  distinction  is  as  important  as  the  distinction  be- 
tween valorizing  or  fixing  the  price  of  a  pound  of  sugar 
by  controlling  the  sugar  market,  and  adjusting  the  num- 
ber of  pounds  of  sugar  to  make  up  a  dollar's  worth, 
whatever  the  market  conditions  may  be, 

I.  "It  works  only  through  the  flow  of  gold."  This 
misunderstanding  is  common.  It  pictures  the  regu- 
lative machinery  as  though  the  flow  of  gold  into  and 
out  of  circulation  were  the  main  factor.  It  implies 
that  the  only,  or  chief,  effect  of  a  change  in  the  price 
of  gold  is  to  divert  the  flow  of  gold  from  one  channel 
to  another,  overlooking  the  factor  under  a  definite 
reserve  (see  Appendix  I,  §  1), —  that  a  change  in  the 
price  of  gold  and  in  the  weight  of  a  gold  dollar  changes 
the  number  of  dollars  in  a  given  physical  mass  of  gold. 

Laboring  under  the  above  mentioned  misappre- 
hension, one  correspondent  imagines  that  if  all  the 
world  adopted  the  plan  the  result  would  be  to  alter- 
nately "  dump  "  immense  quantities  of  gold  on  to 
the  very  limited  jewelry  market  or  denude  that  mar- 
ket of  all  its  gold,  and  that  the  system  would  demoral- 
ize the  gold  market  and  ultimately  break  down,  for 
the  jewelry  market  is  too  small  to  be  used  as  a  regu- 


Sec.  1,  J]  DISAPPROVAL  OF  THE  PLAN  221 

lator  of  the  gold  of  the  world.  The  tail  could  not 
wag  the  dog. 

The  truth  is,  of  course,  that,  even  if  there  were  no 
jewelry  use  whatever,  there  would  be  ample  regu- 
lation. Thus  a  lowered  gold  price,  or  raised  dollar 
weight,  can  reduce  any  stock  of  gold,  however  large, 
into  a  small  number  of  dollars  simply  by  enlarging 
each  dollar;  while,  contrariwise,  a  raised  gold  price, 
or  lowered  dollar  weight,  can  multiply  any  stock  of 
gold,  however  small,  into  an  ample  supply  simply  by 
breaking  it  up  into  a  larger  number.  It  is  like  multi- 
plying the  loaves  and  fishes,  —  except  that  there  is 
nothing  miraculous  about  it,  since  small  dollars  will 
feed  our  monetary  needs  as  well  as  larger  dollars,  pro- 
vided they  buy  as  much. 

A  correspondent  calls  attention  to  the  fact  that,  at 
critical  times  like  that  of  the  war,  each  nation  tends  to 
grab  gold  and  reasons  that  this  would  destroy  the 
regulatory  action.  On  the  contrary,  while  such  action 
does  destroy  the  regulatory  action  of  our  present  sys- 
tem, thus  revealing  one  of  its  worst  defects,  it  would 
not  affect  that  of  the  proposed  plan.  As  explained  in 
Appendix  I,  §  8,  the  stabilization  system  becomes 
independent  of  foreign  influence.  Under  it  we  could 
let  other  nations  take  any  part  of  our  gold  they  chose 
and  the  remainder,  by  sufficient  subdivision,  would 
meet  our  needs.  Likewise  we  could  withstand  any 
flood  of  gold  —  and  without  suffering  inflation,  or 
shutting  gold  out  as  did  Sweden,  —  simply  by  en- 
larging the  dollars  and  so  diminishing  their  number. 

J.  "It  would  shift  to  the  Government  the  losses  now 
home  by  private  contractirig  parties.'^  This  confuses 
the  losses  and  gains  on  contracts  and  understandings 
expressed  in  terms  of  gold  with  the  losses  or  gains  to 
holders  of  actual  gold.  Except  where  the  Govern- 
ment is  itself  a  party  to  contracts,  the  losses  and 
gains  of  contracting  parties  do  not  affect  the  Govern- 
ment Treasury. 

It  may  be  added,  incidentally,  that  if  it  were  true  that 


222  STABILIZING  THE   DOLLAR  [App.  II 

such  a  shift  to  the  Government  of  all  private  gains 
and  losses  were  really  effected  by  stabilization  the 
net  resulting  burden  on  the  Government  would  be 
just  zero  !  For  the  same  number  of  dollars  that  the 
private  creditor  now  loses  from  depreciation  the 
private  debtor  gains  and  vice  versa. 

This  is  the  reason  that,  above,  in  referring  to  con- 
tracts, the  phrase  "  losses  and  gains  "  was  used  whereas, 
in  referring  to  physical  gold,  the  phrase  ''  losses  or 
gains  "  was  used.  When  gold  depreciates  its  holders 
suffer  loss  and  no  one  else  has  any  corresponding  gain, 
just  as  when  a  case  of  eggs  or  a  box  of  fruit  spoils  the 
owner  loses  and  no  one  else  gains.  Contrariwise  when 
gold  appreciates  the  owner  of  gold  gains  and  no  one 
else  loses. 

This  slight  gain  or  loss  from  holding  gold  is  trans- 
ferred, by  the  stabilization  plan,  to  the  Government 
(or  rather,  is  transferred  from  the  pockets  of  the 
people  back  to  their  pockets  through  increase  or  de- 
crease of  taxation)  as  was  shown  in  Appendix  I, 
§  1,  Z).  But  the  colossal  gains  and  losses  to  contract- 
ing parties  are  not  so  transferred  by  stabilization. 
They  are  simply  destroyed  altogether. 

K.  "It  would  make  a  pretext  for  raising  prices." 
This  idea  is  probably  an  echo  of  the  fact  that  dealers 
have  often  used  the  excuse  that  prices  in  general  were 
high  to  raise  their  own.  The  excuse  was  usually 
valid.  Retail  prices  must  adjust  themselves  to  whole- 
sale prices  and  vice  versa. 

But  it  is  precisely  this  excuse  which  the  stabiliza- 
tion system  would  take  away;  for  the  general  price 
change  which  it  presupposes  is  avoided.  It  would 
certainly  be  a  curious  excuse  for  a  dealer  to  tell  his 
customers  that  he  had  to  change  the  price  of  coal  be- 
cause, last  month,  the  mint  price  of  gold  had  been 
changed  with  the  expressed  object  of  making  such 
changes  in  other  prices  unnecessary  ! 

L.  "It  would  '  tamper  '  with  the  standard  of  value." 
In  truth  it  would  prevent  the  standard  of  value  from 


Sec.  1,  M]  DISAPPROVAL  OF  THE   PLAN  223 

being  tampered  with  by  all  sorts  of  influences  which 
at  present  do  tamper  with  it  constantly.  The  dis- 
covery of  gold  in  California  tampered  with  the  stand- 
ard of  value ;  the  cyanide  process  of  extracting  gold 
tampered  with  it,  and  so  did  the  abolition  of  bimet- 
allism, the  introduction  of  the  gold  exchange  standard, 
the  rapid  growth  of  bank  deposits,  and  the  inflation  of 
the  currency  in  war-time. 

At  first  sight  the  plan  seems  to  many  people  a  plan  to 
change  the  dollar,  while  in  fact  it  would  keep  the  dollar 
from  changing.  It  would  change  the  present  system, 
the  fault  of  which  is  that  it  lets  the  value  of  the  dollar 
change.  The  plan  aims  at  an  invariable  dollar.  If  pre- 
venting the  dollar  from  changing  is  tampering  with  the 
standard  of  value  then  the  Bureau  of  Standards  is  con- 
stantly tampering  with  weights  and  measures. 

One  sarcastic  objector  asks  :  "  Wliy  not  change  the 
weight  of  a  pound  of  cofTee?  "  If  the  dollar  served  the 
purpose  merely  of  a  unit  for  weighing  gold,  it  would  be 
as  absurd  to  alter  it  as  to  alter  the  number  of  ounces 
in  a  pound  of  coffee.  A  unit  of  weight  ought  cer- 
tainly to  remain  invariable  in  weight.  But  we  do  not 
need  the  dollar  as  a  unit  of  weight.  We  need  it  as  a 
unit  of  value,  and  the  trouble  is  that  its  constancy 
in  weight  makes  it  inconstant  as  a  unit  of  value. 

M.  "  Changes  in  the  weight  of  the  dollar  cannot  affect 
its  value  because  only  Government  fiat  can  fix  the  value  of 
money.''  Can  any  one  believe  that  if  the  weight  of  a 
dollar  were  increased  from  the  present  twentieth  of 
an  ounce  to  an  ounce,  or  a  pound,  or  a  ton,  or  the 
entire  mass  of  gold  in  the  world,  that  the  dollar 
would  buy  no  more  than  it  does  at  present?  If  any 
one  by  taking  a  ten-dollar  gold  certificate  to  the  Sub- 
Treasury  or  Assay  Office  could  get  with  it  a  cartload 
of  gold,  would  that  certificate  not  command  more,  not 
only  of  gold,  but  of  things  in  general  than  it  does 
now? 

As  to  Government  fiat,  the  mere  calling  pieces  of 
paper  by  certain  names  without  reference  to  the  amount 


224  STABILIZING   THE    DOLLAR  [App.  II 

in  circulation  has  been  proved  both  by  theory  and  by 
experience  to  be  illusory. 

N.  ''It  is  a  fiat  money  system."  This  misunder- 
standing is  the  opposite  of  the  last  and  even  more 
absurd.  It  is  not  a  fiat  money  system ;  for  the  paper 
money,  under  it,  is  redeemable  and  dependent  for  its 
value  on  the  gold  in  which  it  is  redeemed. 

2.   Alleged  Defects 

A.  "A  goods-dollar  is  not  ideal."  Doubtless  this 
is  true.  But  our  present  gold  dollar  is  still  further 
from  the  ideal !  It  is  significant  that  those  who  offer 
this  "  objection  "  do  not  suggest  some  third  kind  of 
dollar  which  might,  practically,  be  used. 

The  discussion  of  an  ideal  dollar  is  purely  academic. 
It  will  be  time  enough  to  discuss  the  merits  of  a  mar- 
ginal-utility unit  of  value,  a  labor  unit,  or  a  unit  con- 
sisting of  a  given  fraction  of  the  National  income,  when 
any  of  these  units  can  be  statistically  fixed,  that  is, 
when  an  index  number  in  terms  of  such  a  unit  is  forth- 
coming. Until  that  time  the  ideal  standard,  if  such 
there  be,  has  about  as  much  practical  availability  for 
human  use  as  the  money  of  the  planet  Mars.  The 
only  practical  question  is  that  already  discussed  in 
Appendix  I,  §  3,  as  to  what  is  the  best  index  number 
available. 

It  might  be  advantageous,  were  it  possible,  to  distin- 
guish between  that  part  of  a  given  change  in  the  value 
of  the  dollar  which  is  due  to  money  and  that  part 
which  is  due  to  goods.  And  this  could  be  done  by  the 
plan  if  there  were  any  reliable  index  number  of  "  abso- 
lute value."  By  employing  such  an  index  number,  if 
it  existed,  we  could  stabilize  the  dollar  "  absolutely." 
Practically,  of  course,  we  can  only  measure  the  value 
of  money  relatively  to  other  goods. 

This  same  answer  applies  to  those  who  have  the  idea 
that,  instead  of  a  constant  price  level,  a  slightly  falling 
or  a  slightly  rising  or  a  cyclically  changing  price  level 


Sec.  2,  B]  DISAPPROVAL  OF  THE   PLAN  225 

is  more  ideal.  If  those  who  set  up  such  standards  in 
theory  will  set  them  up  in  practice,  i.e.  will  show,  in 
figures,  exactly  how  much  the  price  level  ought  to 
change,  it  will  be  as  easy  to  make  the  index  number 
follow  that  prescribed  course  as  to  keep  it  uniform. 
This  can  be  accomplished  by  precisely  the  same  methods 
as  those  described  above  for  stabilization.  Let  us,  for 
example,  assume  that,  ideally,  prices  ought  to  rise  1  % 
per  annum  instead  of  remaining  constant.  It  would 
evidently  be  as  easy  to  apply  exactly  the  same  method 
of  regulation  as  that  described  in  Chapter  IV  except 
that,  instead  of  hewing  to  the  100%  line,  we  would 
hew  to  a  moving  par.  If,  at  the  start,  the  par  were 
100%,  a  year  later  it  would  be  101%.  At  that  time, 
therefore,  if  the  index  number  should  happen  to  be 
101%  no  change  in  the  dollar's  weight  would  be  made ; 
if,  instead,  the  index  number  should  be  102,  or  1%  too 
high,  the  dollar's  weight  would  be  increased  1%;  if, 
instead,  the  index  number  should  be  100,  or  1%  below 
par,  the  dollar's  weight  would  be  decreased  1%.  Like- 
wise if  the  ideal  course  of  prices  could  be  shown  to 
be  first  in  one  direction  and  then  in  the  other,  all  we 
should  need  to  do  would  be  to  map  out  that  course 
in  figures  and  hew  to  that  line. 

B.  "  People  could  'contract  out,'  "  i.e.  they  could 
frame  their  contracts  in  terms  of  ounces  of  gold  or  any 
other  units  than  the  new  dollars.  So  they  could,  — 
just  as  they  can  now.  But  they  wouldn't  —  not  even 
as  much  as  they  do  now !  There  would  be  no  need  for 
such  action  and  no  desire  for  it.  "  Contracting  out  " 
is  a  phenomenon  which  is  frequent  only  when  it  is  neces- 
sary to  escape  from  some  flagrant  case  of  instability 
as  in  the  days  of  greenbacks  or  of  Colonial  paper 
money.  It  was  such  a  case,  or  the  danger  of  it  in  the 
'90s,  which  gave  rise  to  the  "  gold  clause  "  in  bonds. 

When  the  railways  adopted  "  standard  time  "  there 
were  those  who  predicted  that  many  people  and  com- 
munities would  refuse  to  shift  their  watches.  One 
country  town  in  Maine  did !      But  more  than  99%  of 

Q 


226  STABILIZING   THE    DOLLAR  [App.  II 

the  country  were  led  by  the  convenience  of  the  new 
system  to  adopt  it,  just  as,  later,  they  adopted  the 
similar  shift  for  "  daylight  saving,"  at  which  time  also 
similar  predictions  of  failure  were  made. 

If  any  contracting  parties  should  fancy  that  a  stabi- 
lized dollar  was  less  suitable  to  their  needs  than  some 
other  standard,  their  preferences  should  be  and  could 
be  gratified.  But  such  people  would  be  very  few  and 
far  between. 

C.  "It  would  be  destroyed  by  ivar.^'  It  is  true  that 
war  is  apt  to  put  a  strain  on  whatever  monetary  system 
exists  at  the  time.  It  does  so  when  the  fiscal  needs  of 
the  belligerents  require  or  seem  to  require  resort  to 
inflation.  It  is  also  true  that  there  would  be  more 
strain  on  a  system  which  combats  inflation  than  on  one 
which  yields  to  it.  Inflation  affords  the  cheapest  and 
easiest,  although  the  worst,  way  to  pay  for  a  war.  It 
is,  therefore,  inevitably  the  resource  of  war  finance 
when  all  others  fail.^  As  we  have  seen  (Chapter  II, 
§  9)  it  has  many  subtle  forms.  If  the  dollar  is  to  be 
kept  stable,  it  will  be  necessary  to  raise  the  whole 
revenue  of  the  Government  in  ways  other  than  by 
inflation  {i.e.  by  taxes  or  by  loans  out  of  the  savings  of 
those  who  make  the  loans).  If  the  Government  or  the 
banks  or  the  people  who  finance  the  Government  can- 
not, or  will  not,  finance  it  completely,  without  resort 
to  inflation,  stabilization  will  have  to  be  sacrificed. 

We  have  already  noted  (Appendix  I,  §  7,  A)  how 
this  breakdown  would  come  about  under  paper  money 
inflation.  The  same  principle  would  apply  under  any 
kind  of  inflation  (by  paper  issues  of  the  Government, 
or  of  authorized  banks,  or  by  creation  of  new  bank 
deposits  put  to  the  credit  of  the  Government,  or  to  the 
credit  of  individuals  who  borrow  of  banks  to  loan  to 
the  Government). 

1  Resort  to  inflation  (which  puts  the  burden  of  the  war  in  the 
form  of  the  High  Cost  of  Living  on  those  with  relatively  fLxed  money 
incomes  instead  of  on  the  tax  payer)  is,  at  bottom,  a  reversion  to 
Colbert's  idea  of  Government  Finance,  "the  art  of  plucking  the 
goose  with  the  least  amount  of  squealing.'' 


Sec.  2,  C]  DISAPPROVAL  OF  THE  PLAN  227 

In  short,  stabilization  and  inflation  are  mutually 
incompatible.  If  stabilization  is  to  be  retained  during 
a  war  emergency,  inflation  must  be  sacrificed  as  a 
method  of  war  finance.  Or,  if  inflation  is  to  be  resorted 
to,  stabilization  must  be  sacrificed.  When  the  emer- 
gency comes  choice  between  the  two  must  be  made. 

In  all  ordinary  wars  there  is  no  need  of  inflation  and 
the  stabilization  process  could  go  on  unmolested.  But 
if  we  were  to  have  another  world  war  and  if  the  fiscal 
need  were  so  great  that  there  was,  or  seemed  to  be,  no 
way  to  secure  all  the  needed  funds  without  resort  to 
inflation,  then,  it  is  quite  true,  the  stabilization  ma- 
chinery, if  left  to  work,  would  break  down.  It  would 
be  better  under  such  circumstances  not  to  leave  it  to 
work  but  to  suspend  it  temporarily  just  as  the  Bank 
Act  for  the  Bank  of  England  is  temporarily  suspended 
at  critical  times. 

In  practice,  an  intermediate  course  between  a  stab- 
ilization left  helpless  to  break  down,  and  its  suspen- 
sion would  probably  be  the  result.  The  brassage  lim- 
itation would  prevent  perfect  stabilization  when  the 
tendency  of  prices  to  rise  was  greater  than  the  brassage, 
and  yet  the  rise  could  be  mitigated  and  sufficient 
revenue  from  taxes  could  be  secured  to  keep  the  system 
thus  working  at  half  speed,  so  to  speak.  This  is  illus- 
trated by  Figure  12. 

A  friend  insists  that  a  stabilization  system  must 
be  devised  which  will  withstand  any  war.  One  might 
as  well  say  that  an  automobile  should  be  built  to  with- 
stand any  collision. 

Furthermore,  it  should  be  emphasized  that  the  present 
system  not  only  contains  the  danger  of  monetary  de- 
preciation in  war  time  among  warring  nations  but  in- 
volves neutrals  as  well.  In  fact  the  war  inflation  in 
the  United  States  was  almost  wholly  suffered  while  we 
were  neutral  and  before  we  entered  the  war.  It  was 
a  secondary  effect  from  European  inflation  and  the 
upset  of  international  trade  through  which  we  were 
inundated  by  gold  imports.     From  such  a  catastrophe 


228  STABILIZING   THE    DOLLAR  [App.  II 

in  future  wars,  stabilization  would  deliver  us ;  for,  as 
shown  (Appendix  II,  §  1,  /),  the  only  result  of  an  influx 
of  gold  would  be  to  make  our  gold  dollars  larger.  Our 
price  level  would  remain  intact,  for  the  neutral  would 
not  be  under  the  necessity  of  paper  and  credit  inflation 
as  a  fiscal  expedient. 

Another  sort  of  answer  to  this  objection  is  the 
League  of  Nations  !  We  are  not  likely  for  a  long  time, 
if  ever  again,  to  have  such  an  exigency  as  a  World  War. 
In  short,  the  full  answer  to  the  objection  of  inadequacy 
in  war  time  is : 

(1)  In  all  ordinary  wars  stabilization  would  be 
adequate. 

(2)  Wars  in  which  it  would  not  be  adequate  are  now 
extremely  unlikel}^ 

(3)  In  such  an  emergency  the  system  might  still 
work  "  at  half  speed,"  which  would  be  better  than 
nothing. 

(4)  Or,  it  could,  if  necessary,  be  suspended,  which 
would  leave  us  no  worse  off  than  under  the  present 
system. 

(5)  It  would,  in  any  case,  safeguard  the  standards 
of  non-belligerent  nations. 

(6)  In  no  case  would  it  leave  us  worse  off  than  before. 
D.    "It  could  not  check  rapid  changes. ''     Owing  to 

the  narrow  limits,  e.g.  1%  or  2%  as  stated,  imposed 
on  bi-monthly  adjustments  of  the  dollar's  weight,  it 
is  quite  true  that  a  sudden  and  strong  tendency  of 
prices  to  rise  or  fall,  should  such  occur,  could  not  be 
completely  checked.  If,  for  instance,  prices  were  tend- 
ing to  rise  18%  per  annum  and  the  plan  permitted  no 
more  rapid  shift  than  12%  per  annum,  this  would  leave 
6%  per  annum  uncorrected. 

But  this  6%  would  be  only  one  third  the  rate  at 
which  prices  would  rise  if  wholly  uncorrected.  Half 
a  loaf  (or,  in  this  illustration,  two  thirds)  is  better  than 
no  bread. 

Moreover,  such  cases  are  extreme  and  rare.  When 
they  do  occur  there  is  all  the  keener  need  for  their 


Sec.  2,  F]  DISAPPROVAL  OF  THE   PLAN  229 

mitigation.  If  an  18%  correction  is  needed  we  cannot 
argue  that  we  ought  to  make  no  correction  rather  than 
correct  by  12% !  Furthermore  it  should  be  noted  that 
ultimately,  of  course,  after  the  rapid  spurt  had  abated, 
the  accumulated  weight  of  the  dollar  would  overtake 
the  escaped  price  level  and  bring  it  back  to  par. 

E.  "It  is  too  inelastic."  This  is  the  opposite  of  the 
last  objection.  The  one  objector  who  makes  this 
claim  thinks  the  limitation  complained  of  in  the  pre- 
ceding objection  is  a  positive  advantage  of  the  plan. 
He  would  prefer  to  limit  the  possible  change  of  the 
weight  of  the  dollar  to  2%  per  annum !  His  idea  is 
that  only  secular,  or  long  continued,  changes  in  the 
purchasing  power  of  money  are  injurious  while  shorter 
cyclical  changes  are  desirable  as  an  expression  of  the 
changing  spirit  of  business. 

To  me  this  is  more  fanciful  than  practical.  The 
''  credit  cycle  "  is  one  of  the  very  evils  which  stabi- 
lization aims  to  remedy.  The  satisfaction  the  enter- 
priser has  while  the  boom  phase  lasts  is  partly  gained 
because  of  false  hopes  and  therefore  nullified  later  when 
the  depression  comes  —  like  the  joys  of  a  drunken 
debauch  —  and  partly  gained  at  the  expense  of  others 
of  more  "  fixed  "  incomes  —  a  species  of  social  in- 
justice. 

I  have  little  doubt  that  crises  and  panics  would  be 
practically  impossible  if  we  had  a  stable  dollar  and 
that  the  wide  fluctuations  in  credit  which  precede  and 
follow  a  crisis  would  be  practically  out  of  the  question. 
In  short,  crises  would  be  nipped  in  the  bud.  If  there 
be,  ideally,  a  normal  credit  cycle  it  has  never  been 
shown  and  any  hit  or  miss  restriction  would  be  just  as 
apt  to  make  the  actual  cycle  less  normal  as  to  make  it 
more  normal. 

But,  even  if  it  could  be  granted  that  there  is  some 
substance  to  this  objection,  it  cannot  be  denied  that 
the  plan  proposed  would  be  a  great  improvement  over 
the  present  system. 

F.  "  The  correction  comes  too  late."    It  is  objected 


230  STABILIZING   THE   DOLLAR  [App.  II 

that  the  plan  does  not  make  any  correction  until  an 
actual  deviation  has  occurred,  and  so  the  remedy  al- 
ways lags  behind  the  disease.  This  is  true.  The 
corrections  do  follow  the  deviations  and  so  the  correc- 
tion can  seldom  be  absolutely  perfect.  The  practical 
point,  however,  as  cannot  be  too  often  emphasized,  is 
that  it  is  approximately  perfect  and  far  nearer  perfect 
than  our  present  system.  When  steering  an  automobile, 
the  chauffeur  can  only  correct  the  deviation  from  its 
intended  course  after  the  deviation  has  occurred ;  yet, 
by  making  these  corrections  sufficiently  frequent,  he 
can  keep  his  course  so  steady  that  the  aberrations  are 
scarcely  perceptible.  There  is  no  reason  why  the  mone- 
tary automobile  cannot  be  driven  very  nearly  straight. 

It  is  also  pointed  out  that,  after  the  correction  is 
applied,  it  may  happen  that  prices  will  take  an  oppo- 
site turn,  in  which  case  the  remedy  actually  aggravates, 
for  an  instant,  the  disease.  But,  taking  the  extremely 
fitful  course  of  prices  since  1900,  and  correcting  it,  ac- 
cording to  the  plan,  every  two  months,^  we  find  that 
this  does  not  often  happen  and  never  for  long.  Even 
in  the  few  remaining  cases  the  deflections  caused  were 
very  slight  and  were  soon  corrected  immediately  after 
the  following  adjustments. 

G.  Conclusion  on  "  Alleged  Defects. '^  It  will  be 
seen  that  the  objections  which  have  been  mentioned 
in  this  section  are  all  on  the  ground  of  inadequacy. 
They  are  partly  answered  directly  and  all  are  answered 
by  the  argument  that,  however  inadequate  the  pro- 
posal may  be,  our  present  standard  is  even  more  so. 
Nothing  practical  is  ever  perfect  and  the  imper- 
fection of  a  plan  does  not  condemn  it  if  it  is  better 
than  the  plan  which  it  replaces  and  if  no  plan  still  better 
is  available. 

If  those  who  object  to  stabilization  as  proposed,  be- 
cause it  is  not  perfect,  are  sincere,  they  should  either 
supply  a  criterion  of  the  imperfection  they  emphasize 
in  the  form  of  a  better  index  number,  or  —  if  the  plan 

1  As  shown  in  Appendix  I,  §  9. 


Sec.  3,  A]  DISAPPROVAL  OF  THE  PLAN  231 

as  proposed,  though  not  perfect,  is  more  nearly  so  than 
our  present  crude  fixed-weight-of-gold  standard,  — 
they  should  support  it  heartily  as  a  big  step  toward 
their  own  ideals.  They  should  certainly  not  oppose  it. 
In  the  terse  phrase  of  modern  slang,  they  should  "  put 
up  or  shut  up." 

Those  who  press  the  above  six  objections  do  not 
treat  the  question  as  a  practical  one  but  as  purely 
academic.  So  far  as  the  objectors  have  any  other 
purpose  than  intellectual  gymnastics  their  purpose  is, 
subconsciously  at  least,  obstructive  rather  than  con- 
structive. They  seem  to  think  that,  by  finding  some 
shortcoming  in  the  plan,  they  have  justified  the  mone- 
tary system  which  we  now  have.  They  are,  if  I  catch 
their  spirit  correctly,  staunch  defenders  of  the  status 
quo,  trumping  up  excuses  for  their  temperamental 
hostility  to  change.  This  emotional  attitude  is  dis- 
cussed further  in  the  following  section. 

3.   The  Obstacle  of  Conservatism 

A.  "It  has  never  been  tried.^'  Not  as  a  whole  ;  but 
every  feature  in  it  has  been  tried  and  tested  —  the 
index  number,  issue  and  redemption  ad  libitum  of  gold 
certificates,  varying  the  redemption  rate  (as  in  the 
gold  exchange  standard),  etc.  It  is  simply  a  combina- 
tion of  these  tried  elements. 

Perhaps  the  nearest  existing  approach  to  the  plan  as 
a  whole  is  the  "  gold  exchange  standard  "  of  India 
which  has  virtually  converted  the  silver  rupee  into 
the  gold  standard  somewhat  as  the  proposed  plan 
would  virtually  convert  the  gold  standard  into  the 
composite  standard. 

The  system  here  proposed  would  really  be  no  more 
of  an  innovation  in  principle  than  was  the  Indian 
Gold  Exchange  System  when  introduced  and  developed 
between  1893  and  1900,  while  the  evils  it  would  correct 
are  similar  to,  but  vastly  greater  than,  the  evils  for 
which  the  Indian  system  was  devised.     It  was  con- 


232  STABILIZING   THE    DOLLAR  [App.  II 

servative  England  which,  in  order  to  get  rid  of  the 
comparatively  trifling  inconvenience  of  a  fluctuating 
rate  of  exchange  with  India,  adopted  this  gold  ex- 
change system. 

It  is  true  that  it  is  often  better  to  "  bear  the  ills  we 
have  than  fly  to  those  we  know  not  of,"  But  that 
bit  of  practical  wisdom  was  never  intended  to  blind 
us  to  the  ills  we  do  bear.  These  ills  are  not  only  far 
greater  than  the  ordinary  business  man  has  imagined, 
but  they  are,  I  believe,  destined  in  the  future  to  be- 
come greater  still.  The  reason  for  this  prophecy  is 
found  in  the  ever-growing  tendency  to  spread  and 
multiply  the  ramifications  of  business  contracts  and 
understandings. 

Sometimes  this  same  objection  takes  the  form  of 
the  innuendo :  ''  The  plan  is  altogether  too  simple 
not  to  have  been  adopted  long  ago."  This  is  an 
inarticulate  suggestion  that,  while  the  plan  looks 
sound,  we  must  beware  of  it ;  for  surely  our  wise  fore- 
fathers would  long  ago  have  discovered  and  applied 
anything  so  simple. 

While  this  objection  will  seem  to  most  people  who 
think  for  themselves  merely  inane,  it  really  constitutes 
a  serious  obstacle  in  the  minds  of  many  to  whom  all 
new  ideas  are  suspect.  They  do  not  realize  that 
their  own  attitude  answers  their  own  question.  It  is 
just  because  so  many  people  like  themselves  distrust 
any  change,  that  any  change  is  so  slow  in  coming. 

The  truth  is,  however,  that  neither  the  idea  of 
stabihzation,  nor  its  application,  is  as  new  as  it 
seems  to  most  people,  as  is  shown  in  Appendices  V 
and  VI.  To  my  mind,  considering  how  slowly  new 
ideas  usually  spread,  the  wonder  is  that  the  progress 
toward  acceptance  of  the  idea  has  been  so  rapid.  A 
generation  ago  index  numbers,  a  vital  element  in  the 
plan,  were  suspect ;  now  they  are  almost  universally 
used  among  intelligent  business  men.  At  the  be- 
ginning of  the  Great  War  the  correction  of  wages  by 
means  of  an  index  number  was  a  purely  academic 


Sec.  3,  C]  DISAPPROVAL  OF  THE  PLAN  233 

idea  and  was  ridiculed  when  first  suggested  seriously. 
To-day,  as  recorded  in  Appendix  V,  §  2,  it  is  in  use 
among-  a  number  of  progressive  industrial  concerns 
and  some  official  agencies. 

The  present  stabilization  plan  has  itself  received  the 
approval  of  several  hundred  prominent  economists, 
educators,  bankers,  business  pien,  lawyers,  publicists, 
and  officials,  as  is  shown  in  Appendix  IV,  §  3. 

B.  "  The  tide  may  turn."  This  suggestion  is  to  let 
well  enough  alone  because  perhaps  the  wrongs  of  the 
present  may  be  righted  in  the  future  by  a  reverse 
movement  of  the  price  level. 

But,  even  if  there  should  be  such  a  reversal  in  store 
for  us,  two  wrongs  will  not  make  a  right.  If  prices  are 
to  fall,  there  is  the  same  need  of  a  stabilizer  as  though 
they  were  to  rise.  When  prices  were  falling  the  same 
sort  of  cheer  was  offered  us  :  "  Wait,  prices  may  rise  !" 

If  this  reasoning  were  correct  we  ought  now  to  be 
thankful  for  the  rising  cost  of  living  as  a  providential 
compensation  for  the  falling  prices  of  1873-1896  ! 

In  order  to  prove  the  needlessness  of  standardization 
it  must  be  shown  that,  in  the  future,  we  have  reason 
to  expect  neither  a  rise  nor  a  fall  of  prices  but  a  stable 
price  level  —  a  condition  of  things  which,  so  far  as 
index  numbers  show  us,  has  never  yet  existed,  and 
which  we  feel  safe  in  saying  can  never  exist  under  our 
present  monetary  system. 

C.  "It  requires  governmental  interference."  In  these 
days  of  Governmental  participation  in  economic  prob- 
lems this  objection  will  not  frighten  many  people, 
especially  as  the  increase  in  Governmental  func- 
tions over  those  already  existing  in  the  regula- 
tion of  the  value  of  money  is  infinitesimal.  The 
Government  already  buys  and  sells  gold,  handles 
gold  reserves  of  several  kinds,  and  publishes  an  index 
number.  The  plan  does  little  more,  except  to  use  the 
index  number  to  set  the  price  at  which  the  Govern- 
ment buys  and  sells  gold,  in  order  to  make  the  dollar 
a  real  standard  of  value  instead  of  leaving  its  value 


234  STABILIZING   THE    DOLLAR  [App.  II 

to  chance.     The  Government  also  standardizes  every 
important  unit  other  than  the  dollar. 

Furthermore,  the  Constitution  of  the  United  States 
in  Section  8  expressly  authorizes  Congress  "  to  coin 
money,  regulate  the  value  thereof,  —  and  fix  the  stand- 
ard of  weights  and  measures," 

While,  when  the  Constitution  was  adopted,  there 
could  have  been  no  thought  of  employing  an  index 
number  for  regulating  the  value  of  money  any  more 
than  there  was  thought  of  using  aeroplanes  for  carry- 
ing the  mails,  there  was  thought  of  stabilizing  the  pur- 
chasing power  of  money.  In  fact  it  was  the  instability 
of  the  Colonial  and  ''  Continental  "  paper  money 
which  was  doubtless  largely  responsible  for  this  clause 
and  for  the  clause  forbidding  the  individual  states 
from  coining  or  issuing  money. 

Therefore,  not  only  should  we  not  complain  of 
the  plan  as  giving  new  functions  to  the  Government 
but  we  may  complain  that  this  ancient  Constitutional 
function  has  not  been  performed  as  it  should  be  to 
keep  pace  with  modern  methods  of  measuring  the 
value  of  money. 

We  may  go  further  and  say  that  some  Governments 
have  not  only  been  negatively  guilty  (of  neglect  to  pro- 
vide a  stable  yardstick  of  commerce)  but  positively 
guilty  (of  disturbing  the  monetary  standard). 

In  our  own  Colonial,  Revolutionary,  and  Civil 
War  history  our  American  Colonies  and  national 
Government  depreciated  their  monetary  standards. 
In  the  Great  War  every  belligerent  country  did  so  and 
incidentally  ruined  the  monetary  standards  of  neutral 
countries.  It  should  be  added,  however,  that  our 
own  Government  officials,  from  the  President  down, 
strove  to  avoid  inflation  and  succeeded  more  nearly 
than  did  the  officials  of  any  other  belligerent  country 
—  a  fact  in  which  we  may  take  some  pride. ^ 

^  As  shown  elsewhere  American  inflation  was  chiefly  gold  inflation 
before  we  entered  the  war,  and  our  war  inflation,  such  as  occurred, 
was  largely  credit  inflation  of  private  persons  borrowing  of  banks. 


Sec.  3,  E]  DISAPPROVAL   OF   THE   PLAN  235 

D.  "  We  could  not  interest  other  countries.''  The 
force  of  this  objection  has  been  greatly  weakened  by 
the  war  which  has  created  world-wide  interest  in  the 
problem  of  reconstructing  monetary  standards.  No 
country  can  fail  to  be  interested  in  all  proposals  toward 
that  end.  Furthermore,  as  has  been  shown  in  Ap- 
pendix I,  §  8,  the  adoption  of  stabilization  in  one 
country,  especially  if  that  country  be  the  United 
States,  would  probably  lead  to  its  general  adoption 
elsewhere. 

E.  "  The  evils  are  unreal."  So  far  as  this  objection 
is  definite  it  has  been  answered  in  Chapter  III  which 
shows  how  real  the  evils  are.  One  ingenious  objector 
seriously  suggests  that  the  increase  in  gold  may  be 
due  to  "  some  as  yet  unknown  social  law  which  brings 
out  this  increased  supply  to  meet  or  to  stimulate  the 
growing  and  changing  needs  of  industry."  It  is  diffi- 
cult to  answer  this  objection  specifically,  until  the 
"  as  yet  unknown  social  law  "  is  discovered.  As  yet 
no  one  has  been  able  to  discover  such  a  law.  Surely 
the  quest  for  gold  is  instigated  by  private  gain  and 
not  by  any  desire  to  "  meet  or  stimulate  industrial 
needs  "  nor  is  the  gain  which  the  gold  prospector  re- 
ceives or  hopes  for  proportionate  to  the  occult  public 
service  suggested.  His  success  can  surely  have  no 
quantitative  relation  to  social  needs.  On  the  con- 
trary, the  discoveries  of  gold  are  fortuitous  and  con- 
form to  no  "  law  "  of  social  benefit,  known  or  un- 
known. This  objection  is  clearly  born  of  the  dis- 
credited tradition  of  laissez  faire  with  its  fallacious 
dogma  that  the  public  interest  is  always  served  by 
allowing  rampant  individualism.  Under  this  idea 
we  used  to  have  unplanned  streets  without  standard 
building  lines,  unsanitary  and  fire-trap  tenements, 
wildcat  banking,  railway  rate  discrimination,  un- 
sound insurance,  chaotic  and  fraudulent  weights  and 
measures,  private  coinage.  Our  present  difficulties 
as  to  monetary  standards  are  due  precisely  to  this 
rampant  individualism.     We  have  intrusted   the  de- 


236  STABILIZING   THE    DOLLAR  [App.  II 

termination  of  our  yardstick  of  commerce  to  the  luck 
of  the  gold  prospector,  to  the  inspirations  of  geniuses 
in  metallurgy,  to  changes  in  banking  systems,  and  to 
policies  of  Government  finance. 

F.  Conclusion.  Unless  I  am  greatly  mistaken  the 
foregoing  objections  —  that  the  plan  has  never  been 
tried ;  that  it  is  suspiciously  simple ;  that  it  would 
mean  Governmental  interference ;  that  it  would  be 
impossible  to  enlist  the  interest  and  cooperation  of 
foreign  countries  (even  granted  that,  after  much  labor 
and  pains,  we  secured  the  requisite  attention  at 
home) ;  that,  rather  than  go  to  so  much,  possibly 
futile,  trouble,  it  is  far  better  to  wait  and  see  if  the  price 
situation  will  not  right  itself ;  that,  after  all,  it  is  not 
so  bad  that  it  might  not  be  worse ;  and  that,  anyway, 
we  should  rather  "  bear  the  ills  we  have  than  fly  to 
those  we  know  not  of,"  —  are  at  bottom  not  intellec- 
tual but  emotional  objections.  They  are,  as  the 
modern  psychologist  might  put  it,  the  "  rationalized  " 
excuses  by  which  a  preexisting  and  temperamental 
hostility  to  anything  new  is  defended. 

The  contrast  between  the  great  number  and  the 
small  importance  of  all  the  objections  offered  is  note- 
worthy. The  large  number  of  misunderstandings  is 
what  we  always  expect  in  the  subject  of  money.  But 
the  large  number  of  trumped  up  and  trivial  objections 
is  what  one  might  expect  when  a  deeply  rooted  prej- 
udice against  a  plan,  as  a  ''novelty,"  is  combined 
with  a  lack  of  any  real  ammunition  with  which  to 
attack  it.  The  impression  is  forced  on  us  that  those 
who  find  so  many  objections  to  the  new  plan  really 
have  just  one  —  that  it  is  new. 

This  impression  is  further  strengthened  when  it  is 
observed  how  the  various  objections  so  often  destroy 
each  other.  I  have  sometimes  observed  that  when 
many  different  objections  are  offered  to  any  proposi- 
tion they  are  mutually  inconsistent.  If  the  plan  were 
wrong,  some  glaring  defect  would  presumably  stand 
out  in  the  foreground.     But  in  this  case  every  oppo- 


Sec.  3,  F\  DISAPPROVAL  OF  THE  PLAN  237 

nent  has  his  own  set  of  objections.  In  fact,  as  the 
objections  show,  they  are  often  mutually  contradic- 
tory. It  is  "  too  simple  "  and  "  too  complicated  " ; 
"  too  slow  "  and  *'  too  sudden  "  ;  it  is  wrong  "  be- 
cause it  is  fiat  money  "  and  "  because  it  is  not  fiat 
money  "  ;  "it  is  simpler  to  make  extraneous  adjust- 
ments by  index  numbers"  and  "  adjustments  are 
unnecessary  anyhow  "  ;  "  gold  is  stable  enough  as  it 
is  "  and  "  the  adjustment  would  not  be  sufficiently 
accurate  "  ;  "it  ties  us  up  to  the  quantity  theory  " 
and  "it  is  inconsistent  with  that  theory  "  ;  "  it  would 
not  permit  cycles  of  credit  "  and  "  it  would  produce 
crises  "  ;  "it  fails  to  be  ideal  "  and  "it  is  too  idealis- 
tic "  ;  "a  national  stabilization  would  isolate  us  too 
much  "  and  "  an  international  stabilization  would  en- 
tangle us  too  much" ;  "it  would  offer  the  govern- 
ment a  dangerous  chance  to  secure  profit  "  and  "  it 
would  cost  the  government  unduly  "  ;  "  it  is  too  radi- 
cal "  and  "it  is  mere  temporizing  with  evils  requiring 
the  total  abolition  of  money  or  capital  "  ;  "it  would 
not  permit  needed  inflation  in  war  time  "  and  "  it 
would  be  totally  destroyed  by  war,"  and  so  on. 

After  careful  examination,  I  think  every  fair-minded 
man  who  has  any  serious  wish  to  see  the  world  in  which 
he  lives  improved  will  agree  that  all  the  objections 
brought  against  the  plan  are,  without  exception, 
either  fallacious  or  trivial. 

Long  experience  with  pubhc  propaganda  has  taught 
me  how  intensely  stubborn  is  the  temperamental 
resistance  to  change,  and  perhaps  quite  as  much  so 
among  the  intelligent  as  the  ignorant,  especially  as 
the  intelligent  have  the  advantage  of  being  more 
fertile  in  inventing  objections. 

Gold  has  become  a  sort  of  fetish  of  business  men, 
almost  worshiped  with  superstitious  awe.  Our  fathers 
had  told  us  that  "  nothing  is  so  solid  as  gold."  Only 
recently  are  people  awakening  to  the  fact  that  the 
fetish  is  erratic  and  tricky.  The  argument  that  we 
ought  not  to  try  to  improve  our  monetary  unit  be- 


238  STABILIZING   THE   DOLLAR  [App.  II 

cause  of  the  purely  mythical  wisdom  of  those  who  un- 
consciously and  accidentally  handed  it  down  to  us 
is  only  an  appeal  to  that  curious  and  baneful  preju- 
dice against  progress  which  every  hoary  tradition 
creates. 

Our  present  standard,  or  lack  of  standard,  is  due  to 
an  historical  accident  and  yet  we  go  on  traditionally 
using  it  simply  because  we  got  started  in  that  groove, 
just  as  Boston  still  uses  its  crooked  streets,  never 
originally  chosen  with  any  reference  to  modern  traffic  ; 
or  just  as  we  still  use  the  original  railway  gauge,  set  by 
the  horse  carriage ;  or  just  as  we  left  our  National 
banking  system  virtually  undisturbed  for  two  genera- 
tions after  the  passing  of  the  Civil  War  conditions  which 
gave  it  birth  ;  or  just  as  until  May  19,  1828,  we  had  no 
standard  weight  for  determining  the  contents  of  coins ; 
or  just  as  until  after  1832  we  had  no  standard  units  of 
length,  weight,  or  volume  for  the  use  of  the  custom- 
houses. 

All  our  customary  units  of  length,  weight,  and 
volume  were  changed  on  April  5,  1893,  by  order  of  the 
Superintendent  of  Weights  and  Measures,  under 
authority  of  an  international  agreement.^  Acts  to 
standardize  measures  of  fruits  and  vegetables  (the 
standard  barrel  and  box)  have  been  very  recently 
passed  by  Congress.  The  National  Food  Adminis- 
tration has  lately  ordered  that  potatoes  be  sold  by  the 
pound  (which  is  uniform  in  all  the  states)  instead  of 
by  the  bushel,  which  varies  in  weight.  The  long- 
pending  bills  to  substitute  the  metric  for  the  custom- 
ary standards  are  still  pending.  No  standard  unit 
has  any  sacredness  of  age.  We  have  changed  and 
perfected  them  throughout  our  history,  and  we  are 
still  busy  with  changing  and  perfecting  them.  Physi- 
cists are  now  beginning  to  suggest  that  our  standard  of 
length  should  be  the  wave  length  of  light  at  a  certain 

1  History  of  Standard  Weights  and  Measures  of  the  United  States, 
by  L.  A.  Fischer.  Bulletin  of  the  Bureau  of  Standards,  Vol.  I, 
pp.  365-381. 


Sec.  3,  F]  DISAPPROVAL  OF  THE  PLAN  239 

point  in  the  spectrum.  Why,  then,  should  we  be 
afraid  to  perfect  the  dollar? 

After  any  new  plan  has  been  tried  and  established 
these  same  conservatives  turn  about  and  become  its 
most  staunch  supporters.  This  fact  has  been  often  illus- 
trated in  our  monetary  and  banking  system.  Nothing 
short  of  the  shock  of  Civil  War  was  able  to  divert 
us  from  a  state  system  of  banking  to  a  national  one. 
Later  the  proposal  for  a  Federal  Reserve  system  was 
objected  to  most  vigorously  by  bankers  accustomed 
to  the  old  system. 

The  resistance  of  conservatism  is  strong  at  first  but 
has  no  resihency.  It  is  not  like  the  resistance  of  a  steel 
spring  which,  when  pushed  in  one  direction,  will  press 
back,  but  rather  like  the  resistance  of  a  mass  of  dough 
or  putty  wliich,  though  it  resists  impact  strongly,  yet 
when  it  is  once  moved  stays  inert  and  does  not  return. 
Under  these  circumstances,  even  if  progress  is  made  an 
inch  at  a  time,  it  is  worth  while  to  try  to  make  it. 

And  now  this  obstacle  of  conservatism  —  the  one 
great  obstacle  —  has  been  considerably  lessened  by 
the  Great  War,  which  has  shaken  the  whole  world  out 
of  old  ruts.  Even  Great  Britain  is  considering  giving 
up  her  ancient  monetary  system  —  of  pounds,  shillings, 
and  pence  —  in  favor  of  a  decimal  coinage.  Such  a 
change  would  be  felt  by  the  people  generally  far  more 
than  would  the  proposal  here  made. 

The  prejudice  and  ignorance  on  this  subject  of 
monetary  standards  may  be  overcome  either  (1) 
slowly,  by  education  beginning  in  the  universities,  and 
filtering  gradually  through  the  business  world,  as  edu- 
cation in  the  index  number  has,  or  (2)  more  quickly, 
under  the  stimulus  of  some  sudden  and  spectacu- 
lar change  in  the  purchasing  power  of  monetary  units 
such  as  the  war  is  now  affording  or  such  as  may  come 
later  from  some  great  chemical  discovery  of  how  to 
extract  gold  from  the  low-grade  clays  of  the  South,  the 
gravel  of  the  Sacramento  River  or  from  sea  water. 

Just  now  the  all-sufficient  answer  to  those  who  fear 


240  STABILIZING   THE   DOLLAR  [App.  II 

to  take  so  "  radical  "  a  step  should  be  that  its  so-called 
radicalism  would  save  us  from  the  real  and  dangerous 
radicalism  with  which  the  world  is  now  threatened  ! 

Some  time,  sooner  or  later,  the  idea  will  cease  to  be 
new.  We  shall  get  as  used  to  it  as  we  have  to  Day- 
light Saving  or  the  League  of  Nations,  which  were  new 
ideas  a  short  time  ago ;  for  the  index  number,  more 
and  more  utilized,  will  continue  to  remind  us  of  our 
present  instability.  Already  in  spite  of  the  distin- 
guished character  of  some  opponents  or  semi-opponents, 
the  weight  of  real  authority  is  on  the  side  of  the  plan 
and  not  of  its  opponents. ^ 

But  the  number  of  those  who  have  as  yet  studied 
the  plan  or  even  considered  its  basic  idea  is  very 
limited.  Before  any  control  of  the  price  level  can  be 
actually  undertaken,  a  larger  public,  especially  in  the 
business  world,  must  learn  to  realize  its  necessity. 
So  long  as  the  mass  of  business  men  fail  to  realize  that 
they  are  daily  gambling  in  changes  in  the  value  of 
money,  a  fact  of  which  they  are  blissfully  unaware, 
no  great  demand  for  preventing  those  changes  is 
likely  to  be  felt ;  and  the  business  man  is  the  party 
whose  interests  are  chiefly  involved. 


4.    The  Obstacle  of  Special  Interests 

A.  Debtor  and  Creditor.  One  of  the  supposed  ob- 
stacles to  the  stabilization  of  the  dollar  is  the  opposition 
of  interest  between  debtor  and  creditor. 

This  supposed  obstacle  takes  two  forms,  one  the 
fear  that  there  would  be  a  struggle  for  advantage  at 
the  outset  over  the  par  to  be  adopted  for  the  price  level 
and  the  other  the  fear  that  the  subsequent  operation 
of  the  system  would  give  rise  to  disputes  between  these 
two  general  classes. 

The  first  supposition  represents,  it  is  true,  what  may 
prove  a  real  difficulty.     The  settlement  of  this  ques- 

1  See  Appendix  IV,  §  3. 


Sec.  4,4]  DISAPPROVAL  OF  THE  PLAN  241 

tion  will  be  like  the  adjustments  of  the  interests  of 
various  classes  of  stockholders  and  bondholders  in  a 
reorganization  or  hke  retiring  the  greenbacks  and  re- 
suming specie  payments.  This  is  a  Gordian  knot  which 
will  have  to  be  cut  when  the  time  comes  in  the  manner 
which  then  seems  best  in  view  of  all  the  circumstances. ^ 

But  it  is  quite  possible  that  even  the  introduction 
of  the  system  would  scarcely  call  for  more  than  passing 
notice.  This  has  usually  been  true  when  monetary 
standards  have  been  changed  whether  for  good  or  ill. 
The  average  Filipino,  or  the  average  inhabitant  of 
India,  had  no  real  conception  of  the  changes  which  were 
wrought  by  the  adoption  of  the  *'  gold  exchange  stand- 
ard," if  indeed  he  ever  heard  of  it.  The  average 
American  in  1873  paid  little  attention  to  the  de- 
monetization of  silver,  or  in  1879  to  ''resumption," 
once  that  it  had  been  decided  on  in  1875.  So  also 
to-day  the  average  American  is  still  unaware  of  the 
recent  changes  in  our  banking  and  currency  laws,  even 
of  the  extensive  substitution  of  Federal  Reserve  notes 
for  gold  certificates. 

But,  —  to  turn  to  the  second  form  of  the  supposed 
obstacle,  —  after  the  start-off  had  once  been  decided 
upon,  the  subsequent  operation  of  the  system  would 
not  arouse  contests.  On  the  contrary,  it  would  avoid 
them.  Experience  proves  that  the  creditor  and  debtor 
classes  do  not  get  aroused  when  the  price  level  is  fairly 
stable  but  only  after  the  most  drastic  and  long  con- 
tinued changes. 

Thus  it  took  over  two  decades  of  falling  prices  after 
1873  to  arouse  the  debtor  class  to  a  realization  of  its 
losses,  and  then  only  after  much  agitation. 

Likewise  to-day  it  is  hard  to  make  the  average  man 
realize  that  the  depreciation  of  the  dollar  has  affected 
the  interests  of  creditor  and  debtor.  Though  econo- 
mists may  clearly  show  by  index  numbers  that  the  bond- 
holder has  not  really  been  getting  any  interest,  i.e.  has 

1  For  my  suggestions  as  to  how  to  solve  this  part  of  the 
problem,  see  Appendix  I,  §  4. 


242  STABILIZING   THE   DOLLAR  [App.  II 

been  losing  the  equivalent  of  more  than  100%  of  his  in- 
come, yet  the  ordinary  man  who  believes  "  a  dollar  is  a 
dollar  "  gives  scant  attention  to  such  a  proposition 
and,  if  he  finds  any  fault  at  all  with  rising  prices,  vents 
his  wrath  not  upon  inanimate  gold  or  credit  but  upon 
the  luckless  ''profiteers,"  the  retailers,  the  landlords, 
the  trusts,  the  middlemen,  the  tariff,  or  the  trade  unions. 

So  also  the  savings  bank  depositor,  who  during  the 
last  two  decades  has  been  defrauded  of  all  his  interest 
through  the  depreciation  of  the  dollar,  does  not  yet 
understand  either  this  fact  or  its  cause. 

The  reason  for  such  astounding  indifference  to  the 
colossal  interests  involved  is  that  the  loss  is  indirect 
and,  until  recent  years,  has  not  even  been  measured. 

It  has  always  been  found  that  there  is  less  complaint 
under  indirect  than  under  direct  taxation.  The  or- 
dinary tax  payer  feels,  and  complains  of,  direct  taxa- 
tion because  he  can  see  and  measure  it.  But  the 
economist  cannot  rouse  the  tax  payer  from  his  lethargy 
enough  to  make  him  cry  out  against  the  outrages  of 
indirect  taxation.  All  the  cartoons  and  figures  de- 
signed to  show,  for  instance,  how  the  tariff  taxes  the 
consumer,  make  comparatively  Httle  impression ;  and 
it  has  required  several  generations  to  bring  the  Amer- 
ican consumer  to  the  point  of  even  mildly  protesting 
against  a  high  tariff.^ 

If,  then,  there  is  so  conspicuous  an  absence  of  com- 
plaint over  huge  losses,  because  hidden,  it  is  not  to 
be  expected  that  there  will  be  complaint  over  the  cor- 
rection of  these  losses,  especially  as  these  corrections 
also  lie  hidden  from  view,  or  over  the  small  fluctuations 
left  uncorrected.  To  be  specific :  if,  as  experience  proves, 
the  price  level  has  to  change  more  than  twenty-five  per 
cent  before  eliciting  protests  we  need  not  fear  quarrels 
over  one  or  two  per  cent. 

In  short,  if  the  monetary  system  proposed  were  once 

^  Even  this  protest  was  largely  based  on  the  recent  general  rise 
In  the  cost  of  living  mistakenly  attributed  to  the  tariff  as  the  chief 
cause. 


Sec.  4,  A]  DISAPPROVAL  OF  THE  PLAN  243 

adopted,  there  would  be  very  little  attention  paid  to 
it.  The  business  world  would  be  as  unconscious  of 
the  operation  of  stabilization  as  a  healthy  man  is  of 
his  stomach  or  hver.  Only  the  changes  in  the  price 
of  gold  would  register  the  operation  of  the  system  and 
few  persons  besides  the  gold  exporter,  importer,  jeweler, 
and  miner  would  ever  notice  what  the  price  of  gold 
was.  The  ordinary  man  would,  just  as  to-day,  buy 
and  sell  with  yellowbacks  or  other  money  or  checks, 
blissfully  unaware  that  these  have  any  relation  to  gold. 

The  case  would  be  quite  different  if  the  proposal 
were  to  adopt  the  "  tabular  standard  "  by  correcting 
money  payments  through  the  addition  to,  or  subtrac- 
tion from,  a  debt  of  a  certain  number  of  dollars.  Under 
these  circumstances  the  extra  dollars  paid  or  withheld 
would  stand  out  definitely  like  direct  taxes  as  con- 
trasted with  indirect  taxes.  There  might  then  be 
some  disputes  over  the  correctness  of  these  extraneous 
adjustments  of  contracts.  But,  even  in  such  cases, 
disputes  would  probably  be  rare.  At  any  rate  there 
seems  no  evidence  of  extensive  disputes  where  the 
tabular  standard  has  actually  been  used  as  it  has,  for 
instance,  in  Scotch  Fiars  prices,  in  the  Massachusetts 
law  of  1780  described  in  Appendix  V,  §  1,  and  in  the  re- 
cent adjustments  of  wages  by  various  official  bodies  and 
private  firms  in  the  United  States  and  elsewhere.  This 
being  the  case,  surely  when  the  tabular  standard  is, 
as  it  were,  incorporated  in  the  actual  money  of  the 
country,  the  ordinary  debtor  and  creditor  would  be 
even  less  aware  of  how  his  interests  had  been  safe- 
guarded than  he  is  now  aware  of  how  his  interests  are 
jeopardized  under  our  present  gold  standard.  He 
would  simply  note,  —  after  a  decade  or  two,  —  that 
prices  had  kept  stable. 

It  is  still  more  difficult  to  imagine  a  quarrel  be- 
tween debtor  and  creditor  over  technical  details,  over 
whether  iodine  ought  or  ought  not  to  be  included  in 
the  index  number,  or  whether  wheat  ought  to  be  given 
a  "  weight  "  of  three  per  cent  or  four  per  cent  of  the 


244  STABILIZING   THE   DOLLAR  [App.  II 

total.  As  we  have  seen,  the  influence  on  the  final  index 
number  of  any  one  commodity  or  of  any  other  single 
detail  of  the  system  is  almost  infinitesimal. 

Sometimes  the  objection  takes  the  shape  not  of  fear 
that  debtors  and  creditors  would  quarrel  over  the  plan 
but  that  they  would  find  ways  to  corrupt  or  pervert 
its  administration. 

But  no  room  for  abuse  is  open  either  in  the  Bureau 
of  the  Mint  which  would  regulate  the  weight  of  the 
dollar,  or  in  the  Computing  Bureau,  which  would 
calculate  the  index  number.  In  either  case  the  func- 
tions involved  would  be  clerical ;  the  acts  required, 
specific.  Departures  from  a  strict  comphance  with 
the  law  would  be  instantly  recognized,  and  would  bring 
upon  the  culprit  wrath  and  punishment  proportionate 
to  the  gravity  of  the  offense. 

Thus,  the  Bureau  of  the  Mint,  which  would  regulate 
the  weight  of  the  dollar,  would  do  so  merely  by  buying 
and  selling  gold  at  specific  prices  fixed  for  it  by  the 
Computing  Bureau  ;  and  it  would  have  to  buy  or  sell  at 
the  pleasure  of  the  public.  It  would  have  no  more 
choice  than  does  a  broker  who  is  ordered  to  buy  or  sell 
at  specified  prices. 

In  the  Computing  Bureau,  the  work  of  which  is 
based  on  published  market  prices  and  is  necessarily 
done  in  the  light  of  day,  the  danger  of  abuse  or  fraud 
is  also  negligible.  There  is  some  experience  to  guide 
us  here.  The  gold  exchange  system  which  has  more 
of  a  discretionary  element  in  it  than  the  proposed  sys- 
tem has  not  been  found  to  be  open  to  abuses  but  has 
been  faithfully  executed. 

If  manipulation  of  prices  is  to  be  expected  at  all  we 
should  expect  to  find  it  most  in  the  Scotch  Fiars  prices  al- 
ready referred  to.  In  this  case  money  rents  are  deter- 
mined by  prices  of  wheat  ("  corn  ").  Complaints  of 
unfairness  have  undoubtedly  been  made,  but  to  leave 
money  rent  uncorrected  was  considered  much  more  un- 
fair. I  have  examined  carefully  the  records  of  the  only 
complaint  of  which  I  have  found  mention  in  the  Yale 


Sec.  4,  A]  DISAPPROVAL  OF  THE  PLAN  245 

University  Library.  ^  This  complaint  was  simply  that 
the  jury  was  not  wholly  disinterested  and  did  not  take 
sufficient  testimony.  That  the  system  itself  was  not 
in  dispute  is  shown  by  the  following  interesting  pas- 
sage: 

"It  is  evident,  that  Grain,  sooner  or  later,  and,  probably,  within 
a  short  period,  will  become  the  only  standard,  by  which  land-rents 
will  be  paid  throughout  the  kingdom.  Money,  from  its  fluctuating 
character  for  the  last  thirtj^  years,  has  proved  a  medium  mutually 
unfair,  and  not  less  dissatisfactory,  to  both  landlords  and  tenants. 
Taught  by  past  experience,  no  landlord  is  now  willing,  without 
the  assurance  of  an  adequate  rent,  to  alienate  his  property  for  any 
considerable  length  of  time ;  and  without  lease  of  acre  endurance, 
no  tenant  is  disposed  to  embark  his  capital  and  skill  in  the  adventure 
of  cultivation.  In  Grain,  as  a  measure  of  value,  a  medium  has,  at 
length,  been  found,  which,  while  it  preserves  the  just  rights  of  the 
one,  secures  a  return  for  the  honest  industry  of  the  other." 

Were  the  system  very  unsatisfactory  it  would  scarcely 
have  been  continued  through  over  two  centuries. 

It  should  be  further  emphasized  that,  whatever  slight 
danger  now  exists  of  abuse  of  Scotch  Fiars  prices, 
would  be  almost  infinitely  reduced  by  the  plan  here 
proposed ;  because,  in  that  plan,  we  are  concerned 
with  great  public  markets  in  big  cities,  with  highly 
standardized  grading  of  goods  and  standard  price 
quotations  instead  of  with  small  crude  country  markets, 
and  because  we  have  to  deal  with  a  large  number  of 
commodities  instead  of  with  only  one.  It  is  incon- 
ceivable that  any  sinister  influence,  in  order  to  help 
the  debtor  or  creditor,  could  manipulate  a  sufficient 
number  of  commodities  to  affect  appreciably  the  index 
number.  Even  if  some  one  could  "  corner  "  a  market 
and  double  the  price  of  one  commodity  this  would  not 
raise  the  general  price  level  one  per  cent.  To  accom- 
plish even  such  a  feat  is  out  of  the  question,  while  to 

1  In  the  "Report  of  a  Committee  of  The  Commissioners  of  Supply 
for  Lanarkshire  ;  Appointed  to  enquire  into  the  procedure  by  which 
the  Fiars  of  Grain  for  that  county  were  struck,  for  the  year  1816 ; 
together  with  some  investigation  of  its  principles  and  some  sugges- 
tions for  its  improvement,"  Edinburgh,  1817.  Recorded  in  Tract 
579,  Yale  University  Library. 


246  STABILIZING   THE   DOLLAR  [App.  II 

corner  or  control  a  hundred  commodities  is  unthinkable. 
Moreover,  supposing  such  control  of  commodities  pos- 
sible, we  are  now  far  more  exposed  to  the  danger  of  a 
corner  in  gold  than  we  could  be  to  a  corner  in  hundreds 
of  other  commodities ! 

The  same  argument  applies  to  any  supposed  danger 
of  misquoting  of  prices.  Any  gross  misquotation  such 
as  doubling  the  true  figure  would  be,  of  course,  out  of 
the  question,  while  anything  less  would  be  of  no  use  to 
the  would-be  rascal.  And  if  there  should  be  an  effort 
to  stretch  some  price  quotations  as  far  as  this  could 
be  done  without  detection  (which  would  be  only  a 
single  per  cent  or  two),  the  result  would  not  affect  the 
average  more  than  a  small  fraction  of  one  per  cent, 
which  likewise  would  not  be  enough  to  be  worth  while. 

Furthermore,  experience  shows  that  the  manipula- 
tion of  weights  and  measures  and  moneys  has  not 
occurred  where  they  were  entrusted  to  official  technical 
scientific  bureaus  but  only  where  either  private  or 
political  control  was  permitted. 

One  may  still  see  in  the  museum  of  the  old  Hanseatic 
League  at  Bergen,  Norway,  two  sets  of  weights.  The 
heavier  was  used  for  buying  and  the  lighter  for  selling ! 
The  modern  official  sealer  of  weights  and  measures  has 
reduced  such  fraud  to  a  minimum. 

Similarly  under  the  old  private  right  of  coinage  there 
was  confusion  and  fraud.  But  no  modern  official  mint 
has  been  accused  of  making  light-weight  or  counterfeit 
coins. 

We  conclude,  then,  that  the  fear  of  contests  or  ma- 
nipulations arising  from  the  operation  of  a  stabilized 
dollar  is  quite  groundless.  We  may  go  further  and  say 
that,  on  the  contrary,  such  a  dollar  would  remove  the 
danger  of  contests  and  manipulations,  which  danger  is 
not  only  now  present,  but  is  clearly  due  to  our  unstabi- 
lized  dollar,  ever  affording  grievances  to  the  debtor 
against  the  creditor,  or  vice  versa.  In  1896  the  "  free 
silver"  campaign  derived  its  strongest  support  from  the 
debtor  class,  which  sought  to  "  get  even  "  for  the  losses 


Sec.  4,  A]  DISAPPROVAL  OF  THE   PLAN  247 

and  increase  of  debt-burden  due  to  falling  prices,  i.e.  to 
the  rising  purchasing  power  of  the  dollar. 

The  recent  great  rise  of  prices,  i.e.  fall  in  the  pur- 
chasing power  of  the  dollar,  now  threatens  a  similar 
conflict  of  interests.  The  millions  of  bondholders, 
creditors  to  the  tune  of  hundreds  of  billions  of  dollars 
mostly  growing  out  of  the  war,  will  have  an  interest 
in  stopping  inflation  and  creating  contraction,  while 
the  debtor  classes,  including  the  governments  and  the 
taxpayers,  will  have  an  opposite  interest. 

The  conflict  will  be  mitigated,  of  course,  by  the  fact 
that  the  bondholder  and  the  taxpayer  are,  to  a  large 
extent,  one  and  the  same  person.  But  this  may  not 
prevent  the  conflict  becoming  a  bitter  one.  In  fact 
already  at  least  one  bitter  book  has  appeared  in  Eng- 
land against  contraction,  alleging  that  a  conspiracy 
is  now  being  plotted  by  the  creditor  class  to  destroy 
the  war  currency  and  produce  contraction. 

The  abuse  most  common  in  currency  history  has 
been  inflation  in  the  interest  of  the  debtor  class,  and 
especially  of  the  Government  exchequer.  The  pro- 
posed scheme  would  not  only  be  free  of  this  danger 
but,  when  once  in  operation,  would  be  a  strong  safe- 
guard against  the  whole  idea  of  inflationistic  legislation. 
There  is  always  with  us  a  latent  danger  of  inflation  ; 
but  if  a  stable  dollar  should  be  adopted,  that  danger 
would  be  greatly  diminished. 

The  plan  would  involve  a  double  education.  For, 
first,  it  could  not  be  adopted  until  it  was  realized  that 
its  object  was  to  stabilize  prices  and  maintain  the  con- 
stancy of  the  purchasing  power  of  the  dollar.  In  the 
second  place,  it  would,  therefore,  always  be  a  standing 
object-lesson  as  to  the  principle  of  stability.  Its  adop- 
tion, or  even  its  discussion,  would  tend  to  increase  the 
understanding  of,  and  desire  for,  a  stable  standard  and 
so  fend  off  unsound  schemes.  The  fact  of  the  buying 
and  selling  of  gold  by  the  Government  at  variable  rates 
would  itself  be  informative  as  to  the  object  in  view ; 
and  the  constant  clinging  to  par  of  the  published  index 


248  STABILIZING   THE    DOLLAR  [App.  II 

number  of  prices  would  be  eloquent  testimony  of  how 
the  system  worked. 

Under  our  present  system  inflation  can  be  sug- 
gested without  the  question  of  changing  the  purchasing 
power  of  the  dollar  being  so  clearly  thrust  forward, 
since  our  present  system  does  not  even  pretend  to, 
or  afford  any  mechanism  for,  such  stability.  In  fact, 
inflation  almost  invariably  comes  by  subterfuge  and 
indirection.  If  a  stabilization  system  were  adopted 
any  attempt  to  break  it  down  would  be  an  evident 
and  deliberate  departure  from  the  principle  of  uniform- 
ity in  the  purchasing  power  of  the  dollar. 

We  see  then  that  as  long  as  we  leave  monetary  units 
crude,  unscientific,  unstandardized,  we  run  far  more 
risk  of  political  manipulation  than  we  shall  when  we 
intrust  them,  like  other  units,  to  standardization. 

We  should  set  about  our  search  for  a  just  settle- 
ment of  this  question  before  it  is  allowed  to  become  a 
partisan  or  political  question.  To  stabilize  the  dollar 
and  intrust  it  to  a  scientific  bureau  would  put  it  as 
much  beyond  the  reach  of  manipulation  as  are  the 
astronomical  clocks  of  the  Naval  Observatory  or  the 
weights  and  measures  of  the  Bureau  of  Standards. 

B.  Gold  Producers.  There  is  one  special  commer- 
cial interest  which  might,  until  it  had  thought  the 
matter  through,  feel  inclined  to  oppose  the  proposal, 
—  the  gold  mining  interest.  The  very  crude  fallacy 
that  the  stabilization  plan  would  "  throw  the  losses  " 
now  suffered  generally  on  to  the  Government  has  al- 
ready been  answered  (see  Appendix  II,  §  1,  I).  The 
same  crude  fallacy  has  been  adapted  to  mean  that 
"  the  loss  would  be  thrown  "  on  to  the  gold  miner. 

Gold  producers  might,  under  some  such  notion, 
mistakenly  prefer  the  present  fixed  price  of  gold  to  a 
variable  price.  They  might  on  first  thought  regard 
a  fall  in  the  price  of  gold  as  a  calamity. 

Any  who  would  take  this  view  would  overlook  the 
fact  that  this  lower  price  would  be  in  terms  of  a  heavier 
dollar.     It  really  makes  no  difference  whether  the  gold 


Sec.  4,  B]  DISAPPROVAL  OF  THE  PLAN  249 

miner  sells  an  ounce  of  gold  for  twenty  dollars,  of 
a  twentieth  of  an  ounce  each,  or  for  forty  dollars, 
of  a  fortieth  of  an  ounce  each.  In  fact  the  former  is 
approximately  the  case  in  the  United  States  and  the 
latter  in  Mexico.  If  the  view  were  correct  that  a 
lower  price  of  gold  in  terms  of  a  heavier  dollar  were 
really  injurious  to  the  gold  miner,  why  is  it,  as  I  have 
said  before,  that  gold  miners  do  not  now  sell  all  of  their 
gold  in  Mexico  instead  of  in  the  United  States,  so  as  to 
receive  a  price  twice  as  high  ? 

Again,  it  does  not  matter  whether  the  gold  miner 
receives  a  high  mint  price  and  has  to  pay  dearly  for 
his  machinery,  labor,  supphes,  and  other  costs  of  opera- 
tion, or  receives  a  low  mint  price  and  can  buy  his 
machinery,  labor,  and  supplies  more  cheaply. 

Still  again,  it  does  not  matter  whether  the  miner 
makes  large  money  profits  while  the  cost  of  living  is 
high  or  small  money  profits  while  the  cost  of  living  is 
lower.  In  fact  the  former  is  true  in  Mexico  and  the 
latter  in  the  United  States. 

In  the  long  run,  then,  there  is  no  advantage  or  dis- 
advantage to  gold  miners  from  changing  the  price  of 
gold.  This  is  fundamentally  because  the  price  of 
gold  is  in  terms  of  gold  itself.  It  ought  to  be  clear 
that  the  interests  of  the  gold  miner  are  not  concerned 
with  the  price  of  gold  in  terms  of  itself !  Their  in- 
terests lie  in  exchanging  their  gold  for  real  wealth. 

This  is  well  illustrated  by  recent  history.  Despite 
the  "  fixed  price  of  gold,"  the  war  has,  none  the  less, 
hurt  the  gold  producer  by  inflating  the  world's  cur- 
rencies with  credit  substitutes  for  gold  and  so  lower- 
ing the  value  of  gold,  in  terms  of  other  things. 

Had  the  dollar  been  stabilized  before  the  war  and 
been  kept  stabilized  during  the  war  the  gold  miners 
would  not  have  been  hurt  by  the  war.  They  have  been 
hurt  by  inflation  —  the  flooding  of  the  currency  with 
substitutes  for  their  product.  Consequently  they  have 
asked  for  relief.  They  were  soon  made  to  see  the  futility 
of  any  relief  from  raising  the  price  of  gold  in  terms  of 


250  STABILIZING   THE    DOLLAR  [App.  II 

gold.  They  should  have  no  difficulty,  therefore,  in 
seeing  also  that  lowering  the  price  of  gold  in  terms  of 
gold  would  not  harm  them. 

On  the  other  hand,  while  the  gold  miner  would  feel 
no  special  effect  from  the  stabilization  plan  he  would 
enjoy  the  same  general  advantages  which  it  would 
bring  to  society. 

Furthermore,  resistance  by  the  gold  miners  to  ac- 
cepting a  variability  in  the  price  of  their  product 
which  every  other  industry  has  to  accept,  when  the 
object  of  the  plan  is  to  relieve  all  industries,  their 
own  included,  of  the  variable  unit  of  value,  might  be 
shortsighted ;  for  the  world  will  not  forever  tolerate 
the  intolerable  evils  of  an  unstable  dollar,  and  if  the 
gold  standard  cannot  be  rectified  it  will  some  day  be 
abandoned  altogether. 

It  is  clear,  therefore,  from  several  points  of  view, 
that  only  shortsighted  gold  producers  would  oppose 
the  plan.  In  this  connection  it  may  be  said  that 
several  prominent  gold  mine  owners  have  approved  of 
the  plan. 

C.  Devotees  of  Panaceas.  Another  special  class  of 
objectors  consists  of  reformers  who  have  panaceas 
and  who,  therefore,  consciously  or  unconsciously,  ob- 
ject to  the  intrusion  of  any  rival  remedy.  The  so- 
cialist, the  single  taxer,  and  the  devotees  of  various 
other  reforms,  when  they  object  to  the  plan,  usually 
do  so  merely  because  they  think  that  their  own  pet 
remedy  is  adequate  to  solve  the  whole  problem  of 
social  injustice.  Anything  else,  they  say,  fails  to 
''go  to  the  root  of  the  matter."  They  seize  the 
opportunity,  afforded  by  the  general  desire  for  a 
remedy,  to  make  capital  for  their  own  proposals, 
however  remote  from  the  problem  in  hand.  Social- 
ists especially  systematically  pooh-pooh  any  method 
other  than  socialism  as  "mere  temporizing." 

Such  objections  answer  themselves.  We  might  as 
well  object  to  standardizing  the  yard  or  the  pound,  on 
the  ground  that  such  a  measure  would  not  put  a  stop 


Sec.  4,  D]  DISAPPROVAL  OF   THE   PLAN  251 

to  social  discontent  while  socialism  or  the  single  tax 
would. 

The  plan  to  stabilize  the  dollar  is,  needless  to  say, 
not  put  forward  as  a  panacea  or  as  a  substitute  for 
general  schemes  of  social  reform.  It  has  simply  one 
object,  —  to  supply  a  dependable  unit  of  value.  That 
object  is  not  in  conflict  with  any  other  sincere  plan 
for  social  betterment.  Only  those  who  wish  to  retain 
existing  evils,  confusion,  discontent,  and  suspicion  in 
order  to  make  use  of  them  to  further  their  own  pet 
plans  can  oppose  stabilizing, the  dollar. 

In  this  connection  I  may  mention  an  incident  of  a  few 
years  ago.  Following  an  address  by  me  on  stabilizing 
the  dollar,  a  prominent  radical  socialist  addressed  the 
same  audience  and  attributed  the  high  cost  of  living 
to  "  capitalism."  Afterwards  he  frankly  told  me, 
privately,  that  he  realized  the  truth  of  my  contentions 
but  that,  as  a  socialist,  he  wanted  to  "  make  hay  while 
the  sun  shines  "  and  that  the  high  cost  of  living  was  a 
good  lever  by  which  to  make  the  people  hate  the  exist- 
ing social  order ! 

D.  Speculators.  This  is  the  only  class  which  would 
be  really  deprived  of  great  opportunities  by  stabilizing 
the  dollar.  Speculation  feeds  on  uncertainty.  It  did 
so  after  the  Civil  War  and  is  doing  so  after  the  Great 
War.  The  greatest  beneficiaries  and  the  greatest  victims 
of  great  price  movements  are  speculators.  As  long  as 
uncertainty  exists  speculation  will,  and  should,  exist  and 
the  wise  speculator  in  one  way  and  another  relieves  the 
rest  of  society  of  some  of  its  burden  of  uncertainty,  while 
charging  for  this  service  a  very  high  price.  But  every 
reduction  of  the  hazards  in  business  on  which  speculation 
feeds  marks  a  step  forward  in  civilization.  Stabilizing 
the  dollar  would  mark  such  a  step  forward,  though  of 
course  it  would  by  no  means  take  away  all  opportuni- 
ties to  make  money  by  taking  chances. 


APPENDIX  III 

ALTERNATIVE    PLANS 

I.   A  Sound  Alternative 

A.  Introduction.  This  book  was  written  not  so 
much  in  behalf  of  the  specific  plan  described,  which 
is  regarded  as  the  most  practicable,  as  to  show  that 
the  problem  of  stabilizing  the  dollar  and  the  price  level 
is  soluble. 

Many  readers  would  like  to  know  what  alternative 
plans  have  been  suggested.  Of  these  the  only  one 
which  seems  worthy  of  careful  consideration  is  that 
suggested,  in  a  conversation  with  me,  by  Professor 
Gilbert  N.  Lewis,  Professor  of  Chemistry  of  the  Uni- 
versity of  California.  He  asked  if  it  would  not  be 
possible  to  have  paper  certificates  redeemable  in  the 
actual  goods-dollars  instead  of  in  their  gold  equivalent. 

It  would,  of  course,  be  impracticable  literally  to  main- 
tain the  "free  coinage,"  i.e.  deposit,  of  goods-dollars  for 
certificates  on  the  one  hand  and  the  free  redemption  of 
these  certificates  in  goods-dollars  on  the  other ;  because 
these  goods-dollars  would  be  too  heavy,  bulky,  and  per- 
ishable to  use  as  reserve,  as  well  as  for  other  reasons. 

Nevertheless  it  would  be  entirely  practicable  to 
secure  the  desired  regulation  of  the  quantity  and 
value  of  paper  certificates  by  a  simple  device  for  in- 
direct issue  and  redemption. 

Such  a  system  would  first  be  launched  by  the  con- 
version of  our  present  gold  certificates  into  certifi- 
cates entitling  the  bearer  to  redemption  in  goods  in 
accordance  with  the  plan  described  below.     All  other 

252 


Sec.  1,  B]  ALTERNATIVE   PLANS  253 

money,  bank  notes,  etc.,  would  of  course  be  redeemable 
in  these  goods-dollar  certificates. 

B.  Redemption  Warrants.  The  essence  of  redemp- 
tion of  these  goods-dollar  certificates  is  that  their 
holder  would  be  able,  with  certainty  and  without  much 
trouble,  expense,  or  delay,  to  exchange  them  for  the 
commodities  specified  and  in  the  quantities  specified. 
This  object  could  be  substantially  attained,  as  Pro- 
fessor Lewis  suggested  to  me,  by  using  the  device  of 
warrants  for  commodities  as  intermediate  between 
money  and  conmiodities.  This  would  break  up  re- 
demption into  two  stages.  The  first  stage  would  be 
when  the  holder  of  certificates  would  present  them  (in 
convenient  lots  of,  say,  one  thousand  dollars)  at  the 
Treasury  and  receive,  in  exchange,  a  set  of  separate 
specific  warrants  or  orders,  each  warrant  being  for  a 
specified  amount  of  a  particular  one  out  of  the  collec- 
tion of  commodities  represented.  Thus  one  warrant 
might  be  for  a  thousand  board  feet  of  lumber,  another 
for  haK  a  ton  of  sugar,  etc.,  the  entire  collection  consti- 
tuting a  thousand  goods-dollars. 

The  second  stage  would  be  when  these  various  war- 
rants would  be  presented  at  separate  offices  for  redemp- 
tion in  their  respective  commodities. 

It  is  not  necessary  to  discuss,  at  length,  the  exact 
organization  of  such  offices.  My  object  here  is  simply 
to  show  that,  if  we  were  willing  to  make  the  innovation 
of  establishing  such  redemption  offices,  the  plan  would 
be  economically  feasible.  Various  methods  could  be 
used.  Thus  the  Government  could  set  up,  in  Wash- 
ington, New  York,  or  elsewhere,  or  in  several  different 
places,  a  great  Government  department  store  or  agency 
which,  whatever  else  it  did,  would  receive  these  warrants 
and  either  hand  over  the  goods  from  stock  or 
agree,  as  immediately  as  practicable,  to  secure  and 
deliver  the  goods  called  for.  Another  method  would 
be  for  the  Government  to  license  a  single  private 
agency  to  conduct  the  business  of  redeeming  the  war- 
rants for  due  consideration.     A  third  method  would 


254  STABILIZING   THE    DOLLAR  [App.  Ill 

be  to  license  a  number  of  such  agencies,  say  one  for 
each  commodity.  In  this  case,  the  most  natural  agen- 
cies would  be  existing  large  dealers  in  the  various  com- 
modities concerned,  a  lumber  merchant  for  redeeming 
lumber  warrants,  a  wheat  dealer  for  the  wheat  war- 
rants, a  coal  dealer  for  coal,  etc. 

Nor  do  we  need  to  discuss,  in  detail,  the  method  by 
which  the  Government  would  reimburse  any  agencies 
it  employed.  It  could  pay  lump  sum  retainers  or  the 
actual  costs  involved.  The  method  simplest  to  under- 
stand would  be  for  the  coal  dealer,  for  instance,  after 
honoring  a  warrant  for  coal,  to  present  a  bill  for  said 
coal,  at  current  prices,  or  at  contract  prices,  to  the 
Government,  accompanying  the  bill  with  the  warrant 
as  evidence  of  the  validity  of  the  bill.  This  arrange- 
ment would  be  like  that  made  for  tourists  by  "  Cook's  " 
and  other  companies  which  sell  warrants  for  meals 
and  lodgings  which  are  honored  by  hotels  and  later 
sent  back  to  Cook's  with  bill  for  services  rendered. 

C.  Unrestricted  Redemption  via  Warrants.  What- 
ever may  be  the  business  arrangements  best  suited 
for  providing  a  working  mechanism  by  which  the 
Government  would  redeem  certificates  in  the  particu- 
lar commodities  which  the  certificates  represent,  our 
present  interest  lies  in  the  working  of  that  mechanism 
to  stabilize  the  dollar. 

The  essence  of  the  operations  described  is  that 
certificate  dollars  are  freely  redeemable  in  goods- 
dollars  (via  warrants). 

Such  redemption  would  serve  to  correct  any  incip- 
ient depreciation  of  the  certificate-dollar  relative  to 
the  goods-dollar. 

For,  if  the  index  number  should  rise  much  above  par, 
i.e.  if,  in  the  open  markets,  the  collection  of  goods  con- 
stituting one  thousand  goods-dollars  cost  much  more 
than  a  thousand  dollars  of  certificates,  recourse  would 
be  had  to  redemption.  Speculators  or  warrant-brokers 
would  arise  who  would  find  it  profitable  to  gather  to- 
gether, say,  $100,000  in  certificates,  redeem  them  in 


Sec.  1,  D]  ALTERNATIVE  PLANS  255 

warrants,  redeem  those  warrants  in  commodities,  and 
sell  these  commodities  in  the  open  market  for,  say, 
$110,000  of  certificates,  thus  making  a  profit  of  $10,000 
(less  expenses)  on  the  series  of  transactions.  As  long 
as  the  index  number  were  enough  above  par  to  make 
such  operations  pay,  redemption  would  go  on.  The 
certificates  so  redeemed  would  be  canceled,  thus  con- 
tracting the  currency  and  reducing  the  index  number 
toward  par. 

In  short,  if  such  redemption  of  money  into  com- 
modities existed  some  people  would  refuse  to  patronize 
the  markets  at  very  high  prices  and,  instead,  patronize 
the  Government  which  guaranteed  to  redeem  certifi- 
cates in  goods. 

D.  Unrestricted  Deposit  of  Goods- Dollars.  So  far 
we  have  considered  only  one  of  the  two  great  regu- 
lators of  the  value  of  money ;  namely,  unrestricted 
redemption  of  certificates  in  goods,  constituting  the 
outflow  of  money  from  circulation.  The  other  is  the 
"  free  coinage  "  or  unrestricted  deposit  of  goods,  or 
some  equivalent  system  of  issuing  certificates  for 
goods,  constituting  the  inflow  of  money  into  cir- 
culation. While,  as  already  said,  it  would  be  imprac- 
ticable to  have  literal  composite  goods-dollars  brought 
to  the  mint  to  be  exchanged  for  certificates  exactly  in 
the  manner  that  gold  is  now  exchanged,  yet  essentially 
the  same  result  could  be  secured  by  the  intermediation 
of  warrants.  The  warrants  would,  in  this  case,  pass 
from  merchants  to  the  Government  instead  of  from 
the  Government  to  merchants  as  in  the  operation 
of  redemption. 

To  fix  our  ideas,  we  may  suppose  a  licensed  war- 
rant-broker executing  the  following  operations :  First, 
with  money  (certificates)  he  buys  up  from  miscel- 
laneous sources,  wherever  he  can  get  the  lowest  prices, 
the  bill  of  miscellaneous  goods  constituting,  say, 
$100,000  in  goods-dollars.  Some  or  all  of  these  may 
be  left  in  the  custody  of  the  respective  dealers  from 
whom  he  buys;  but  their  ownership  passes  to  him. 


250  STABILIZING   THE    DOLLAR  [App.  Ill 

Secondly,  he  draws  a  sworn  warrant  for  each  of 
these  lots  of  goods  and  presents  at  the  Treasury  the 
total  assortment  of  such  warrants,  i.e.  in  the  propor- 
tions required  to  constitute  goods-dollars.  He  re- 
ceives, in  exchange,  $100,000  of  certificate-dollars. 
He  has  then  virtually  coined  his  goods  into  money  or, 
at  any  rate,  deposited  100,000  goods-dollars  and  re- 
ceived 100,000  certificate-dollars. 

After  the  operation  the  Government  then  owns  the 
miscellaneous  bill  of  goods,  or,  let  us  rather  say,  a 
credit  or  right  against  the  warrant-brokers  to  furnish 
100,000  goods-dollars  on  demand  or  short  notice  (a 
right  which  would  be  enforced  whenever  the  goods 
were  needed  for  redemption  of  certificates). 

The  above  process,  simulating  free  coinage,  would 
prevent  the  goods-dollar  falling  much  below  the  cer- 
tificate-dollar ;  for,  as  long  as  it  is  low  enough  to  make 
such  "  coinage  "  of  goods  into  money  profitable,  such 
coinage  or  deposit  would  continue.  Thus  if  the  mer- 
chant described  above  found  that,  at  current  prices, 
he  could  buy  up  the  commodities  constituting  100,000 
goods-dollars  for  only  $90,000  he  would,  after  deposit- 
ing them  for  $100,000,  be  making  a  profit  of  $10,000 
(less  expenses).  The  volume  of  money  would  then 
expand,  prices  would  rise,  and  the  profit  on  such 
operations  would  cease. 

In  short,  the  "  free  coinage  "  of  goods-dollars  would 
keep  prices  up  because  holders  of  goods,  rather  than 
sell  at  very  low  prices  in  the  open  market,  would  avail 
themselves  of  the  Government's  standing  offer  to  buy 
1000  goods-dollars  for  1000  certificate-dollars. 

E.  Summary.  These  two  processes,  equivalent  to 
our  present  free  or  unrestricted  coinage  and  redemp- 
tion, would  keep  prices  from  falling  much  below,  or 
rising  much  above,  par.  They  would  thus  put  limits 
on  the  possible  fluctuations  of  the  index  number,  re- 
demption taking  place  when  the  upper  limit  was 
reached  and  "  coinage  "  or  deposit  taking  place  when 
the  lower  limit  was  reached.     As  long  as  the  price  level 


Sec.  2]  ALTERNATIVE  PLANS  257 

lay  between  these  limits,  there  would  be  neither  redemp- 
tion nor  '*  coinage." 

It  is  scarcely  worth  while,  as  I  am  not  advocating 
this  plan,  to  go  into  much  further  detail.  But  it  may 
be  pointed  out  that,  if  desired,  the  limits  to  the  index 
number  may  be  narrowed  if  the  Government  would 
bear  the  expense  in  clerk  hire,  rent,  interest,  etc.,  in- 
volved in  the  broker's  work  of  conducting  his  opera- 
tions (just  as,  to-day,  for  an  analogous  reason  the 
Government  bears  the  expense  of  the  Mint). 

We  have,  so  far,  assumed  that  money,  i.e.  certifi- 
cates, would  come  into  being,  as  to-day,  only  by  the  act 
of  "  coinage,"  i.e.  by  the  deposit  of  (warrants  for) 
commodities  and  never  by  mere  arbitrary  issue  to 
defray  Government  expenses,  as  in  the  case  of  "  fiat 
money  "  ;  and,  likewise,  that  money  would  pass  out 
of  existence  only  by  the  act  of  redemption,  i.e.  by  the 
issue  of  warrants  for  commodities.  The  monetary 
system  would  then  be  strictly  analogous  to  our  present 
system,  gold  being  replaced  by  a  composite  of  com- 
modities.    It  would  not  be  a  ''  fiat  money  "  system. 

2.   The  Same  System  Modified  by  the  Omission 
of  "  Free  Coinage  " 

We  could,  although  with  danger  to  the  system, 
omit  the  "  free  coinage  "  feature,  provided  we  per- 
mitted the  issue  of  certificates  for  Government  ex- 
penses and  relied  on  such  issue  ceasing  as  soon  as  the 
resulting  tendency  toward  redundancy  brought  about 
a  demand  for  redemption.  If,  under  such  an  arrange- 
ment, the  Government  should  persist  in  overissuing 
paper  certificates  with  one  hand  while  redeeming  them 
with  the  other,  it  would  be  losing  through  redemption 
what  it  would  gain  by  the  issue,  in  an  "  endless  chain." 

As  to  the  opposite  possibility,  that  of  contraction, 
there  would,  if  free  coinage  were  not  employed,  be  no 
safeguard.  Nor  would  any  be  needed ;  for  while, 
theoretically,   the  issue   of   certificates   might   be   in- 


258  STABILIZING   THE   DOLLAR  [App.  Ill 

sufficient  to  keep  the  price  level  up  to  par,  in  actual 
practice  the  Treasury  would  be  sure,  in  self-interest, 
to  issue  all  it  could  without  producing  redundancy  and 
loss  from  redemption. 

The  system  described  in  this  section  would  be  exactly 
analogous  to  a  system  into  which  our  present  gold 
standard  system  would  be  transformed  if  we  were  to 
drop  the  free  coinage,  or  deposit  of  gold  (and  permit, 
instead,  the  issue  of  certificates  in  payment  of  Govern- 
ment expenses  hmited  merely  by  the  obligation  to 
redeem  in  gold). 

3.    The  Same  System  Modified  by  the  Omis- 
sion of  Redemption 

To  make  our  statement  complete  and  symmetrical 
it  should  be  added  that  we  could  imagine  the  opposite 
modification  of  the  system,  the  "  free  coinage  "  feature 
being  retained  but  the  redemption  feature  omitted,  the 
Treasury  being  allowed  to  issue  certificates  not  only 
in  exchange  for  (warrants  for)  commodities  but  also,  at 
discretion,  for  expenses.  But  such  a  system  would 
work  only  theoretically,  i.e.  on  the  assumption  that  the 
Treasury  should  systematically  keep  down  its  issues. 
It  would  be  effectually  stopped  from  undue  contraction 
(were  there  any  danger  of  that !)  by  the  loss  which 
would  be  imposed  on  it  by  warrant-brokers  in  demand- 
ing "  coinage  "  of  commodities.  But,  practically,  the 
temptation  would  always  be  to  expand  and,  as  there 
would  be  no  clear  check  on  expansion,  such  a  system 
would  be  almost  sure  to  break  down.  It  would  be,  in 
effect,  what  is  called  a  "  fiat  money"  system  and  little, 
if  any,  better  than  a  pure  "  fiat  money  "  system  in  which 
there  is  neither  redemption  nor  coinage  but  only  dis- 
cretionary issue.  Such  a  system  is  fundamentally  un- 
sound because  there  is  nothing  to  check  inflation.  It 
would  be  analogous  to  a  system  into  which  our  pres- 
ent gold  standard  system  could  be  transformed  by 
omitting  redemption.      Many   writers    {e.g.   Parsons, 


Sec.  4]  ALTERNATIVE  PLANS  259 

Winn,  and  even  Alfred  Russel  Wallace)  have,  it  is 
true,  seriously  proposed  such  a  discretionary  system. 
But  both  experience  and  theory  condemn  it.  No 
system  yet  proposed  is  really  sound  which  omits  the 
feature  of  redemption  (nor  is  any  system  entirely 
sound  if  it  omits  the  feature  of  deposit) .  Where  paper 
money  is  vaguely  assumed  to  "  represent  "  commodi- 
ties without  any  active  redemption  to  make  it  good 
such  representation  is  a  mockery.  Thus  the  famous, 
or  infamous,  ''  assignats  "  of  the  French  Revolution 
were  supposedly  "  based  "  on  land  but  were  in  no  way 
restricted  thereby. 

4.   A  Money  Based  on  Labor 

Others  have  suggested  a  plan  somewhat  analogous  to 
the  foregoing,  the  standard  being  a  day's  work  of  com- 
mon labor. 

We  have  as  usual  to  consider  the  two  fundamental 
operations  of  issue  and  redemption. 

The  plan  provides  for  the  virtual  free  "  coinage  " 
of  such  day's  work  into  labor  certificates  by  having 
the  Government  oflfer  work  on  public  roads  or  other 
public  works  issuing  a  fixed  sum  of  money,  e.g.  three 
dollars  for  such  day's  work  of  common  labor. 

No  provision  for  redemption  is  made,  however. 
The  certificates  are  receivable  in  taxes,  but  this  does 
not  make  them  convertible  into  day's  work.  The 
theory  is  that,  should  there  be,  at  any  time,  an  excess 
of  certificates  in  circulation,  their  issue  would  be  checked 
as  workmen  would  refuse  to  work  for  the  Government 
at  the  fixed  price  when,  as  a  consequence  of  inflation, 
they  could  get  more  from  private  employers. 

This  system  is  in  essence,  therefore,  the  one-sided 
system  described  in  §  3.  It  is  as  if  we  had  free  coinage 
or  unrestricted  deposit  of  gold  for  our  present  gold  cer- 
tificates without  provision  for  redemption  (although 
the  certificates  would,  of  course,  be  legal  tender  and 
receivable  for  taxes). 


260  STABILIZING   THE    DOLLAR  [App.  Ill 

The  faults  of  such  a  system  are  :  (1)  Lack  of  redemp- 
tion as  a  decisive  check  on  inflation.  (2)  The  conse- 
quent temptation  to  inflate  by  issuing  the  certificates 
for  general  expenses.  (3)  The  inconvenience  and  help- 
lessness of  the  Government  as  to  the  amount  of  the  pub- 
lic work  it  would  thus  give  out.  Sometimes  workers 
would  apply  in  large  numbers  and  the  Government 
would  have  to  give  them  work,  even  if  it  did  not 
really  need  them.  At  other  times  workers  would  apply 
in  small  numbers  or  not  at  all,  because  attracted,  for 
the  time,  by  private  employers  and  the  Government 
could  not  secure  their  services  as  it  could  not,  without 
spoiling  the  currency,  bid  above  its  fixed  price.  Public 
works  would  thus  be  entirely  subordinated  to  the  main- 
tenance of  the  currency.  (4)  The  lack  of  definiteness 
of  '^  a  day's  work  of  common  labor  "  and  the  lack  of 
its  fluidity. 

The  question  of  the  relative  virtues  of  the  labor 
standard  and  the  commodity  standard  is  discussed  in 
my  Purchasing  Power  of  Money,  Chapter  X,  §  4. 

5.    Govermnental  Control  of  Gold  Production 

Mr.  B.  M.  Anderson,  Jr.,  suggests  international 
Governmental  control  of  gold  mining,  or  a  variable 
tax  on  gold  mining.  The  former  has  already  been 
mentioned.^  The  latter  would  be  unjust  to  gold 
miners  and,  for  that  reason  alone,  impracticable.  The 
plan  proposed  in  this  book  must  not  be  confused  with 
such  a  plan.  It  is  not  a  plan  to  control  the  output  of 
gold.  As  shown  in  Appendix  II,  §  4,  the  gold  miner 
would  not  be  adversely  affected  but  would  share  in 
the  general  advantage  and  prosperity  which  the  plan 
would  bring. 

6.   The  Tabular  Standard 

As  is  shown  under  "  anticipations  "  in  Appendix  VI, 
§  3,  D,  the  idea  of  a  tabular  standard  is  a  very  old  one, 

1  See  Appendix  I,  §  1,  L. 


Sec.  6]  ALTERNATIVE   PLANS  261 

and,  as  shown  under  ''  precedents,"  in  Appendix  V,  it 
has  in  a  number  of  instances,  notably  during  the  Great 
War,  been  actually  employed. 

The  proposal  is,  not  to  change  the  monetary  stand- 
ard itself  but  to  correct  its  injustices  in  any  contract 
by  supplementary  payments  from  the  debtor  to  the 
creditor  or  vice  versa  according  to  an  index  number. 
If  a  debt  for  $1000  were  contracted  in  1900  and  paid 
in  1920  and  if  the  index  number  in  1920  were  250,  on  the 
basis  of  100  for  1900  the  debtor  who  had  engaged  to 
pay  by  the  tabular  standard  would,  in  1920,  owe  250% 
X  $1000,  or  $2500 ;  that  is,  he  would  supplement  the 
$1000  which  his  debt  calls  for  by  $1500  under  the 
tabular  standard  agreement. 

This  plan  would,  apparently,  accomplish  everything 
which  the  plan  proposed  in  this  book  would  accom- 
plish and  without  disturbing  our  monetary  system  in 
the  least. 

Practically,  however,  it  would  never  accomplish 
more  than  a  small  fraction  of  what  a  true  stabilization 
of  the  dollar  would  accomplish  and,  if  widely  used, 
would  really  cause  considerable  disturbance,  of  one 
sort  and  another. 

As  a  makeshift  in  an  emergency  this  plan  is  worth 
while,  especially  for  correcting  wages,  but  its  incon- 
veniences stand  in  the  way  of  a  wide  adoption, 
especially  in  ordinary  times.  In  the  absence  of  a  real 
standardization  I  favor  ^  it  most  heartily  and  hope 
that  it  may  serve  as  a  stepping  stone  toward  something 
better. 

The  two  chief  objections  are  (1)  the  inconvenience 
of  calculating  (which  would  be  like  that  which  would 
be  caused  if  we  were  to  use  as  our  yardstick  of  length 
the  height  of  a  barometer  and  had  to  employ  a  new 
correction  factor  each  day  for  selling  cloth)  and  (2)  the 
trouble  which  would  come  from  the  fact  that  the  tabu- 
lar standard  would  only  be  partially  employed.     Thus 

1  See  Irving  Fisher,  "Adjusting  Wages  to  the  Cost  of  Living," 
Monthly  Labor  Review,  November,  1918, 


262  STABILIZING  THE  DOLLAR  [App.  Ill 

if  a  merchant  corrects  the  items  only  on  one  side  of  his 
ledger  by  an  index  number,  his  profits  would  be  destab- 
ilized rather  than  stabiUzed.-^ 

^See  Irving  Fisher,  The  Purchasing  Power  of  Money,  New 
York  (Macmillan),  p.  336,  and  "Rejoinder  by  Professor  Fisher," 
American  Economic  Review,  June,  1919,  pp.  256-262. 


APPENDIX   IV 

PUBLIC    INTEREST 

I.   Either  an  Upheaval  or  a  Collapse  of  Prices 
Weakens  Confidence  in  Money 

In  Chapter  III  certain  historical  effects  of  changes 
in  the  level  of  prices  were  noted.  These  were  selected 
to  illustrate  the  evils  of  an  unstable  dollar. 

We  are  here  interested  in  certain  other  historical 
effects  of  price  movements,  namely  those  on  popular 
ideas  of  money. 

Any  noticeable  change  in  the  price  level  is  practically 
sure  to  produce  a  crop  of  complaints  and  of  proposals 
to  remedy  the  disturbance.  At  first  these  popular 
complaints  and  proposals  ignore  money,  for  the  reason 
that,  as  explained  in  Chapter  II,  the  popular  mind  is 
full  of  fallacies  about  money.  To  look  to  the  dollar 
as  a  cause  of  great  price  movements  in  food,  steel,  and 
cotton,  is  literally  the  last  thing  to  occur  to  the  ordinary 
man.  When  those  more  versed  in  monetary  theory 
suggest  that  the  dollar  may  have  any  such  role  to  play, 
the  idea  is  at  first  greeted  with  derision.  But  if  the 
price  movement  is  rapid  and  long  continued,  the  idea 
of  a  monetary  cause  behind  it  gradually  begins  to  enter 
the  minds  of  men  least  impervious  to  new  ideas. 

The  chief,  though  not  the  only,  examples  of  such 
violent  price  convulsions  are  found  during  and  follow- 
ing great  wars. 

During  a  war,  if  the  fiscal  needs  are  great,  inflation 
is  apt  to  take  place.  After  inflation  has  wrought  its 
harm,  a  healthy  distaste  for  inflation  sets  in  and  leaves 
its  impress  on  politics,  legislation,  and  the  national  tra- 
dition.    Each  war  supplies  its  particular  object  lesson 

2G3 


264  STABILIZING   THE   DOLLAR  [App.  IV 

and  adds  a  little  to  the  education  of  the  people  on  the 
money  problem,  although,  unfortunately,  the  lesson  is 
largely  forgotten  by  the  time  it  is  next  needed  and  the 
old  costly  way  of  learning  to  lock  the  door  only  after 
the  horse  is  stolen,  goes  on. 

It  is  surprising  how  often  a  forgetful  public  will 
repeat  its  old  mistakes.  The  exigencies  of  war  finance 
again  bring  a  tremendous  pressure  toward  inflation 
which  again  brushes  aside  the  feeble  scruples  left  from 
a  dimly  remembered  past. 

And  sometimes  these  faint  traditions  are  made  to 
count  for  much  less  by  changing  the  form  of  inflation. 
The  public  will  often  condone  the  new  and  disguised 
form  of  inflation  even  when  they  would  turn  their 
backs  on  the  old  forms.  For  instance,  many  business 
men,  while  having  a  healthy  dread  of  irredeemable 
paper  money,  yet  did  not  object  to  the  laws  of  1878  and 
1890  providing  for  inflating  our  currency  with  silver, 
and  they  nearly  yielded  to  the  "  free  silver  "  sirens 
in  1896.  In  recent  years  we  have  had  much  gold  in- 
flation. Yet  even  to-day,  only  a  small  minority  of 
people  will  admit  the  possibility  that  there  could  be 
any  such  inflation. 

Credit  inflation  is  even  more  subtle  and  enticing. 
Many  will  remember  the  fallacies  current  when  the 
United  States  entered  the  war.  One  orator  told  his 
audience  they  need  make  no  effort  at  all  in  order  to 
subscribe  to  Liberty  Loans.  "  All  you  need  to  do," 
he  said,  "is  to  go  to  a  bank  and  borrow  the  money 
which  you  are  to  lend  to  the  Government,  agreeing  to 
let  the  bank  have  the  bond  you  buy  with  that  money 
as  collateral  security.     It's  just  perpetual  motion  !  " 

Even  to-day  there  are  those  who  will  deny  that 
there  has  been  inflation  of  any  kind  during  the  Great 
War.  Such  denial  is  always  found  as  a  mental  "  de- 
fense "  whenever  there  has  been  inflation. 

But  sooner  or  later  the  truth  is  admitted  and  the 
temper  of  the  people  and  their  statesmen  becomes  one 
of  "  good  resolutions." 


Sec.  1]  PUBLIC  INTEREST  265 

The  abuses  of  paper  money  inflation  have  usually 
called  forth  some  attempts  to  safeguard  against  it. 
It  was  in  order  to  escape  from  such  evils  in  Colonial 
days  that,  in  Massachusetts,  the  commodity  bonds 
described  in  Appendix  V,  §  2,  below,  were  devised. 
These  Colonial  abuses  and  those  of  the  Continental 
paper  currency  of  the  American  Revolution  led  also 
to  the  provision  in  our  Constitution  forbidding  states 
to  emit  "  Bills  of  Credit." 

After  the  English  experience  with  depreciated  money 
in  the  Napoleonic  wars  came,  as  natural  consequences, 
the  great  investigations  on  prices  by  Tooke  and  New- 
march  and  the  classic  Bullion  Report  of  Parliament. 

After  the  flood  of  gold  in  the  '50s  we  note  a  great 
interest  in  the  instability  of  money.  It  was  soon  after 
this  that  Jevons  devised  the  index  number  as  a  meas- 
ure of  the  general  level  of  prices  and  wrote  on  ''  a 
serious  fall  in  the  value  of  gold." 

After  our  experience  with  the  greenbacks  of  the  Civil 
War,  the  subject  of  money  and  prices  became  one  of 
intense  interest.  There  were  soon  developed  two  par- 
ties, the  inflation  and  the  contraction  parties,  and  acts 
of  Congress  alternately  favored  first  one  and  then  the 
other  of  the  opposing  policies.  Our  "  Legal  Tender  " 
controversies,  our  Greenback  party  and  our  Resump- 
tion Act,  were  direct  outgrowths  of  the  monetary  in- 
stability of  the  Civil  War. 

An  increasing  and  worldwide  interest  in  money  and 
prices  was  displayed  through  the  long  years  of  falling 
prices,  experienced  throughout  the  world,  between 
1873  and  1896. 

During  that  period  we  find  increasing  complaints, 
many  official  inquiries  and  reports,  and  numerous 
proposed  remedies,  including  various  forms  of  bimetal- 
hsm  and  several  anticipations  of  the  very  stabilization 
plan  of  this  book  (see  Bibliography,  Appendix  VI).  In- 
ternational conferences  assembled  to  discuss  the  gold 
and  bimetallic  questions. 

To  be  more  definite,  there  were  the  Bland-Allison 


266  STABILIZING   THE   DOLLAR  [App.  IV 

Act  and  the  Sherman  Act  for  the  purchase  of  silver, 
and  there  was  the  "  16  to  1  "  campaign  of  1896  for  the 
restoration  of  the  free  coinage  of  silver  as  a  means  of 
restoring  the  old  price  level. 

The  same  interest  was  displayed  when  the  upward 
price  movement  between  1896  and  the  Great  War  was 
going  on.  There  was  then  worldwide  discussion  of 
the  ''  High  Cost  of  Living  "  and  of  gold  inflation  as  its 
possible  cause.  The  newspapers  were  full  of  cartoons 
and  editorials  ;  and  the  magazines,  of  elaborate  articles. 
Numerous  books  appeared ;  much  legislation  was  pro- 
posed and  some  enacted ;  many  investigations  were 
made,  both  official  and  unofficial ;  ponderous  reports 
were  issued  in  many  countries  and  proposals  were  made 
for  an  international  conference  on  the  subject.  Bread 
and  meat  riots  had  occurred  in  many  cities  through- 
out the  world,  from  Berfin  to  Tokio.  Some  people 
insisted  that  there  was  gold  depreciation.  Mr.  Edison 
predicted  that  some  day  the  southern  clays  would  give 
up  their  gold  and  cause  further  loss  in  the  purchasing 
power  of  the  dollar.  Mr.  Carnegie,  in  making  a  gift 
of  ten  milUons  to  the  Carnegie  Institution  of  Washing- 
ton, stipulated  that  a  certain  part  of  the  income  should 
be  set  aside  as  a  sinking  fund  against  "  the  diminishing 
purchasing  power  of  money." 

This  interest  in  the  High  Cost  of  Living  reached  its 
highest  point  in  1914,  but  was  then,  for  a  time,  over- 
shadowed by  the  war. 

Afterward  it  became  apparent  that  the  war  itself 
had  put  the  "  High  Cost  of  Living  "  still  higher.  The 
result  was  to  revive  interest  in  the  subject.  We  spoke 
of  food  famines  and  of  a  supposed  world  scarcity  of 
goods.  We  had  begun  even  to  talk  of  the  inflation 
brought  about  by  issues  of  paper  money,  by  expanding 
war  loans,  and  by  inflowing  gold.  Sweden  practically 
demonetized  gold.  Price  fixing  on  a  vast  scale  was 
tried  in  belligerent  countries. 

Soon  after  the  Armistice,  the  interest  in  the  subject 
took  a  new  start.     The  business  world  began  eagerly 


Sec.  1]  PUBLIC  INTEREST  267 

to  discuss  the  question  whether  the  war  level  of  prices 
was  to  continue.  Mr.  Redfield,  Secretary  of  Commerce, 
tried  in  vain  to  stabilize  prices  by  price  fixing.  A  large 
number  of  the  members  of  the  Massachusetts  legisla- 
ture petitioned  President  Wilson  to  come  home  from 
Paris,  stating  that  the  problem  of  the  High  Cost  of 
Living  here  needed  him  more  than  the  peace  JDroblems 
at  Paris. 

The  foregoing  are  but  a  few  examples  of  the  world's 
bitter  experiences  with  price  movements  in  the  past,  — 
experiences,  we  may  add  with  confidence,  often  to  be 
repeated  in  the  future,  unless  mankind  shall  find  a  way 
to  stabilize  money  units. 

It  is  safe  to  make  the  generalization  that  when  prices 
go  up  or  down  fast  and  far,  the  public  invariably  shows 
a  lively  curiosity  as  to  the  reasons  why  and  an  unwonted 
willingness  to  consider  monetary  causes  as  at  least  a 
partial  explanation. 

Unfortunately,  it  is  also  usually  true  that,  only  a 
few  years  after  the  price  movement  giving  rise  to  this 
dim  idea  has  subsided  or  reversed  itself,  the  idea  is 
forgotten  by  most  people  and  the  public  sink  back 
into  the  fogs  of  the  money  illusion  described  in  Chap- 
ter II,  which  illusion  seems,  in  spite  of  all  the  lessons 
of  history,  to  "  fool  some  of  the  people  all  of  the  time 
and  all  of  the  people  some  of  the  time." 

To-day,  for  instance,  it  requires  the  archaeological 
grubbing  of  an  economist  to  bring  to  light  the  com- 
modity bonds  used  in  Massachusetts  in  1747.  Again, 
the  phrase  ''  it  isn't  worth  a  Continental  "  is  the  only 
surviving  trace  in  popular  memory  of  the  depreciation 
of  the  Continental  paper  money  and  scarcely  any  one 
who  uses  that  phrase  to-day  knows  its  original  mean- 
ing. Few,  in  this  generation,  know  anything  of  the 
greenback  days.  Even  the  more  recent  "16  to  1  " 
excitement,  with  the  remarkable  vogue  of  that  seduc- 
tive book,  "  Coin's  Financial  School,"  and  the  still 
more  remarkable  counter  campaign  for  "  sound  money," 
seem  dim  and  distant  to-day  and  have  scarcely  been 


268  STABILIZING   THE    DOLLAR  [App.  IV 

heard  of  by  millions  of  the  younger  generation.  In 
1896  when  this  "  free  silver  "  contest  was  going  on, 
the  interest  in  money  and  prices  was  at  fever  heat. 
But,  by  the  following  presidential  campaign,  that  in- 
terest had  grown  cold,  though  the  very  same  presi- 
dential candidates,  expressing  the  very  same  opinions 
and  standing  on  much  the  same  platforms  as  in  1896, 
were  in  the  field.  In  another  four  years  the  question 
was  practically  forgotten.  There  was  a  fundamental 
econoiTiic  cause  of  this  rapid  petering  out  of  popular 
interest ;  namely,  the  cessation  of  the  fall  of  prices  com- 
plained of  and  the  beginning  of  a  rise. 

It  appears,  then,  that  public  interest  in,  and  under- 
standing of,  money  usually  gathers  strength  as  a  price 
movement  proceeds,  reaches  a  maximum  at  the  end 
of  the  swing,  and  remains  intense  and  excited  only  a 
few  years  thereafter. 

As  prices  have  now  been  rising  23  years,  we  may 
reasonably  expect  pubHc  interest,  as  soon  as  the  Peace 
Treaty  excitement  has  subsided,  to  grow  intense  and 
remain  so  for  a  few  years  at  least.  If,  as  I  expect, 
prices  continue  high,  the  popular  idea  that  the  high 
prices  were  due  to  war-scarcity  will  have  no  leg  to 
stand  on,  and  the  quest  for  a  satisfactory  explanation 
will  go  on  with  the  greatest  eagerness.  A  member  of 
the  Federal  Reserve  Board  says  the  price  level  problem 
is  the  after-the-war  problem.  Moreover,  as  the  problem 
is  acute  throughout  the  world,  the  noise  of  the  discus- 
sion will  be  reenforced  by  reverberations  from  one  coun- 
try to  another. 

Unfortunately,  the  discussion  still  shows  great  be- 
wilderment and  confusion  of  thought.  We  may  say, 
very  solemnly,  that  seldom  was  there  more  need  of 
correct  thinking.  Without  it  a  misguided  public  may 
attempt  the  impossible;  or,  like  an  infuriated  mob 
of  lynchers,  hang  the  wrong  victim  to  the  lamp- 
post. 

But,  in  spite  of  the  confusion  and  the  great  capacity 
to  forget  old  lessons  which  the  public  always  exhibits^ 


Sec.  1]  PUBLIC  INTEREST  269 

some  of  the  hard  experiences  of  history  do  leave  traces 
of  good  results. 

In  Europe,  the  Napoleonic  wars,  and  in  America, 
the  Civil  War,  seem  to  have  left  at  least  one  indelible 
impression  on  the  minds  of  business  men  —  that  what 
seems  to  be  a  rise  in  the  price  of  gold  bullion  in  terms 
of  current  irredeemable  paper  money  is,  in  reality, 
rather  a  fall  in  the  value  of  paper  money ;  in  short, 
that  it  is  better  to  measure  paper  money  in  terms  of 
gold  than  gold  in  terms  of  paper  money.  This  idea  may 
be  said  to  be  now  a  commonplace. 

I  venture  to  predict  that  the  Great  War  will  have 
left  at  least  one  other  indelible  impression,  marking  a 
new  era  in  popular  intelligence  on  this  subject.  This 
new  idea,  which  I  believe  will  sink  into  the  minds  of 
millions  of  people,  is  that,  just  as  gold  is  a  stabler  stand- 
ard than  paper,  so  are  goods  a  stabler  standard  than 
gold. 

The  chief  reason  that  the  writers  of  the  famous  bul- 
lion report  did  not  take  this  step  forward  is  that,  in 
their  day  and  generation,  no  index  number  by  which  to 
contrast  the  two  existed.  They  could  not  go  back  of 
gold  to  commodities.  Thus,  while  they  tore  off  the 
outer  husk  surrounding  money,  the  kernel  remained 
hidden  from  view. 

And  this  has  been  the  situation  almost  till  to-day. 
One  interesting  consequence  is  that,  during  the  Great 
War,  the  one  anxiety  of  most  governments  and  bankers 
as  to  monetary  standards  was  to  avoid  a  "  premium 
on  gold."  It  was  felt  that  we  were  in  honor  bound 
to  prevent  paper  money  and  bank  deposits  from 
''depreciation."  But  the  only  test  of  depreciation 
generally  recognized  was  the  depreciation  of  paper 
money  relatively  to  gold.  The  idea  that  gold  itself  could 
depreciate  was  conspicuous  by  its  absence.  The  result 
was  that  there  was  little  thought  and  less  effort  to  keep 
gold  at  par  with  commodities.  There  were,  however, 
economists  in  England  and  the  United  States  and  a 
few  business  men  who  did  their  best  to  point  out  the 


270  STABILIZING   THE    DOLLAR  [App.  IV 

absurdity  of  considering  money  stable  simply  because 
there  was  no  open  premium  on  gold. 

It  is  clear  now  that,  in  this  effort  to  avoid  the  re- 
proaches which  followed  the  Napoleonic  and  the  Civil 
Wars,  there  was  an  exaggerated  attention  to  the  form 
rather  than  the  substance,  to  the  letter  rather  than 
the  spirit. 

Sometimes  the  anxiety  to  avoid  technical  deprecia- 
tion became  a  little  ridiculous  and  turned  into  a  desire 
to  conceal  rather  than  prevent ;  for  there  was,  appar- 
ently, in  some  places  and  times,  an  unpublished  and 
unacknowledged  premium  on  gold.^  Some  of  the  efforts 
to  forbid  sales  of  gold  seem  now  somewhat  ostrich-like. 
It  was  also  a  little  strange,  although  there  were  some  valid 
reasons  for  the  practice,  to  preserve  gold  reserves  by  for- 
bidding their  use  as  reserves.  This  reminds  one  of  the 
story  of  the  sea  captain  whose  anxiety  to  keep  an  ade- 
quate supply  of  life  preservers  was  so  great  that  he  nailed 
them  to  the  deck  and  forbade  anyone  to  take  them  up  ! 

It  is  now  getting  to  be  realized  that,  in  spite  of  all 
the  laudable  efforts  to  prevent  the  usual  war-time 
depreciation  of  money,  depreciation  did  actually  occur 
none  the  less  and  in  a  greater  degree  than  in  most  pre- 
vious wars.  Lord  D'Abernon  of  England  remarked 
in  a  recent  speech  in  the  House  of  Lords  that  the 
fall  in  the  value  of  money  during  the  four  years 
of  the  war  had  exceeded  the  fall  in  two  preceding  cen- 
turies. Similar  observations  are  not  uncommon  from 
other  influential  sources  and  will,  I  believe,  become 
increasingly  frequent  and  emphatic.  It  ought  not  to 
be  surprising  if  succeeding  generations  should  criticize 
the  inflationistic  financiering  of  the  Great  War,  es- 
pecially of  the  European  belligerents,  as  severely  as 
we  criticize  that  of  the  Civil  War. 

'  Although  gold  sales  at  a  premium  were  forbidden  by  Order  in 
Council  in  England  there  were  illicit  sales.  On  April  24,  1919,  for 
instance,  gold  was  sold  at  £5  10s  although  the  mint  price  is  £3 
17s  9d.  The  premium  on  gold  was  further  concealed  by  the  "peg- 
ging" of  foreign  exchanges  at  government  expense.  In  Russia  and 
Italy  the  premium  on  gold  was  openly  admitted.  Since  the  war  the 
premium  has  been  explicit  even  in  England. 


Sec.  1]  PUBLIC  INTEREST  271 

In  any  case,  we  shall  gradually  come  to  feel  that  our 
technical  prevention  of  ''  depreciation  "  was  a  hollow 
mockery,  that  we  have  erred  in  thinking  of  depreciation 
as  relative  to  gold  instead  of  as  relative  to  commodities. 

The  many  adjustments  of  wages  during  the  war  by 
an  index  number  of  prices  are  really  a  confession  that 
the  dollar  does  change  and  needs  correction.  In  the 
future,  there  will  be  a  cumulative  effect  on  the  minds 
of  business  men  from  the  tell-tale  index  number.  It 
will  increasingly  impress  upon  them  the  fact  of  the 
dollar's  instability  and  ultimately  make  some  real  stab- 
ilization inevitable.  It  will  gradually  dawn  on  the 
public  that  if  the  dollar  needs  correcting  the  correction 
should  be  incorporated  in  the  dollar  itself  instead  of 
being  patched  on  from  the  outside. 

Just  now  this  problem  of  the  price  level  is  very  real 
and  insistent.  Business  men  will  long  remember  that, 
for  months  after  the  ending  of  the  Great  War,  there 
was  hesitation,  amounting  almost  to  paralysis,  owing 
to  uncertainty  as  to  the  future  level  of  prices.  Abroad, 
the  problem  of  the  price  level  is  even  more  acute,  for 
inflation  there  proceeded  much  further  than  it  did  here. 

Many  expect  prices  to  drop.  A  well-known  and  in- 
fluential business  man  has  said  that  our  present  high 
prices  continue  "  without  the  slightest  reason  under 
the  sun."  There  is,  however,  an  uneasy  feeling  that 
a  fall  of  prices  would  be  as  uncomfortable  as  was  the 
rise. 

Thus,  in  one  way  or  another,  the  Great  War  has 
demonstrated  anew  the  instability  of  monetary  stand- 
ards. The  present  gold  standard,  supposedly  so 
solid,  has  been  largely  discredited  in  the  eyes  of  many 
people  and  we  hear  of  various  proposals  to  replace  it 
by  something  better. 

In  view  of  all  the  facts,  we  may  reasonably  expect 
that  the  money  fog  in  the  public  mind  will  be  more 
nearly  dispelled  during  the  period  immediately  ahead 
of  us  than  at  any  former  time  in  history ;  first,  because 
the  rise  in  prices  has  been  one  of  the  most  rapid  and 


272  STABILIZING   THE   DOLLAR  [App.  IV 

long  continued  ever  experienced ;  secondly,  because 
the  major  part  of  the  rise  has  been  a  war  phenomenon  ; 
thirdly,  because  the  use  of  index  numbers  by  which  the 
rise  in  prices  is  clearly  exposed  introduces  a  new,  strong, 
and  very  persistent  reminder  of  what  has  occurred ; 
fourthly,  because,  whatever  the  reason,  there  is  to-day, 
to  start  with,  a  more  general  and  intelligent  under- 
standing of,  and  interest  in,  this  matter  than  at  any 
previous  time ;  and  fifthly,  because  at  least  one  prac- 
tical solution  of  the  problem  of  stabilizing  the  price 
level,  hitherto  assumed  to  be  insoluble,  is  now  available. 

2.   The  Present  Plan  Grew  Out  of  the  Price 
Movement  Beginning  in  1896 

I  wish  now  to  recur  to  the  influence  on  public  opinion 
of  the  rise  of  prices  preceding  the  war  and  concentrate 
attention  on  that  part  of  this  influence  which  led  up  to 
the  proposals  of  this  book. 

The  rise  of  prices  which  began  in  1896  did  not  attract 
much  attention  for  five  or  ten  years.  In  fact,  as  has 
been  noted,  people  continued  to  talk  of  prices  as  ab- 
normally low.  The  failure  of  the  public  to  appreciate 
the  situation  was  illustrated  by  the  lack  of  literature 
on  the  subject. 

The  list  of  publications  on  the  high  cost  of  living 
published  in  1910  by  the  Library  of  Congress  gives 
for  the  five-year  period,  1896-1900,  only  7  titles; 
while  for  the  next  five  years,  1901-1905,  the  number 
was  36  and,  for  the  next,  1906-1910,  it  was  121. 

As  usual,  political  interest  lagged  behind  public 
interest.  When  the  High  Cost  of  Living  did  attract 
the  attention  of  political  leaders  and  parties  it  led  first 
to  official  reports  in  France,  1900  and  1910 ;  Austria, 
1903  ;  Germany,  1909  ;  United  States,  1910  ;  AustraUa, 
1911;  Canada,  1911;  Italy,  1911;  Great  Britain, 
1911  and  1912;   New  Zealand,  1912;   India,  1914. 

Many  other  investigations  were  projected  but  never 
carried  out,  having  been  overshadowed  by  the  war. 


Sec.  2]  PUBLIC  INTEREST  273 

The  chief  of  these  was  the  project  agitated  in  the 
years  1911-1913  to  hold  an  international  conference 
on  the  high  cost  of  living.  Those  most  interested  in 
this  proposed  conference  hoped  to  see,  as  one  of  its 
results,  a  study  of  plans  for  stabilizing  monetary 
units.  This  proposed  conference  was  the  subject  of 
a  special  message  to  Congress  in  1912  by  President 
Taft.  A  bill  ''  for  the  purpose  of  considering  plans 
to  be  submitted  to  the  various  Governments  for  an 
international  inquiry  into  the  high  cost  of  living,  its 
extent,  causes,  effects,  and  possible  remedies,"  was 
passed  by  the  Senate  and  reported  favorably  by 
the  Committee  on  Foreign  Affairs  of  the  House  of 
Representatives.  Unfortunately  it  was  not  reached 
on  the  House  Calendar  before  adjournment,  March  4, 
1913.  It  was  never  revived  in  the  next  Congress 
—  not  because  of  opposition  but  because  of  the 
preoccupation  of  the  new  administration  and  of  Con- 
gress with  matters  of  greater  importance,  or  so  re- 
garded. 

The  proposed  conference  was  favored  by  a  number 
of  leading  statesmen  and  financiers  in  this  country 
and  in  England,  France,  Germany,  Italy,  and  Japan. 
In  the  Report  of  the  House  of  Representatives'  Com- 
mittee on  Foreign  Affairs  on  this  subject  106  promi- 
nent men  in  the  United  States  were  mentioned  by 
name  as  favoring  the  project,  27  in  Great  Britain,  35  in 
France,  13  in  Germany,  7  in  Austria,  2  in  Canada,  2 
in  Japan,  4  in  Switzerland,  3  in  Italy,  7  in  Belgium, 
3  in  Holland,  3  in  Denmark. 

These  included  Governor  (now  President)  Wilson,  the 
American  Secretaries  of  Commerce  and  Labor,  of  War, 
and  of  the  Treasury,  Senator  (now  President)  Poincare, 
Signor  (now  Premier)  Nitti,  Baron  Sakatani,  former  Min- 
ister of  Finance  of  Japan,  Lord  Courtney  of  England, 
many  Chambers  of  Commerce  and  other  organiza- 
tions in  this  and  other  countries.  After  the  failure 
of  the  project  in  the  United  States,  but  before  the 
Great  War  burst  upon  us,  the  plan  came  near  being  re- 


274  STABILIZING   THE   DOLLAR  [App.  IV 

vived  by  the  Canadian  and  then  by  the  Austrian  gov- 
ernments. During  the  war  comparatively  Httle  was 
done  or  thought  concerning  the  High  Cost  of  Living. 
The  revival  of  interest  now  following  the  war  is  causing 
this  international  conference  to  be  again  considered. 
New  Zealand,  in  particular,  has  shown  an  active  desire 
for  such  a  conference.  Possibly  the  conference  will 
actually  come  about  in  or  through  the  League  of 
Nations. 


3.   Approval  of  the  Plan  for  Stabilizing  the  Dollar 

Whether  or  not  the  price-level  problem  becomes  the 
subject  of  special  international  study,  it  cannot  escape 
soUcitous  consideration  in  the  immediate  future  in 
almost  every  country  on  the  globe  and,  in  that  con- 
sideration, the  role  of  money  cannot  be  ignored. 

In  fact  I  venture  to  predict  that  the  role  of  money 
will  be  increasingly  recognized  and  much  faster  than  is 
dreamed  of  by  most  people.  This  prediction  is  based 
on  the  reasons  given  in  §  1  above. 

The  plan  described  in  this  book  has  already  run  the 
gantlet  of  many  of  the  chief  minds  of  the  world  and 
has  met  with  almost  universal  acceptance  wherever 
it  has  been  examined.  As  one  observer  expresses  it, 
''  only  those  oppose  who  do  not  understand." 

The  unfavorable  opinions  and  comments  have  al- 
ready been  dealt  with  in  Appendix  II.  In  this  section 
I  shall  refer  to  the  favorable  opinions. 

Of  the  many  other  prominent  persons  —  some  200 
in  number  —  who  have  expressed  their  approval  I 
would  mention  especially,  Arthur  T.  Hadley,  President 
of  Yale  University ;  Royal  Meeker,  Commissioner  of 
Labor  Statistics,  Department  of  Labor ;  the  late 
Senator  Newlands;  Senator  Robert  L.  Owen;  ex- 
Senator  John  F.  Shafroth  ;  Clarence  H.  Kelsey,  banker  ; 
Henry  Lee  Higginson,  banker ;  John  Perrin,  United 
States  Federal  Reserve  Agent,  San  Francisco  ;  George 
Foster  Peabody,  Director  Federal  Reserve  Bank,  New 


Sec.  3]  PUBLIC   INTEREST  275 

York ;  Leo  S.  Rowe,  formerly  Assistant  Secretary  of 
the  Treasury ;  Roger  W.  Babson,  Babson's  Statis- 
tical Organization ;  John  Hays  Hammond,  mining 
engineer ;  Sir  David  M.  Barbour,  one  of  the  origi- 
nators of  the  Gold  Exchange  Standard  introduced  in 
India  in  1893 ;  Adolphe  Landry,  member  Chamber 
of  Deputies,  Paris ;  Achille  Loria,  University  of  Torino, 
Italy. 

From  among  the  letters  received  from  these  and 
others  I  select  a  few  quotations  : 

President  Hadley:  "I  will  own  that  when  I  first  read  of  the  plan 
I  thought  it  would  be  very  difficult  to  carry  out  in  practice.  On 
further  consideration,  I  am  confident  that  this  difficulty  is  much 
less  than  I  at  first  supposed ;  and  that  the  advantage  to  be  gained 
by  the  adoption  of  a  project  of  tliis  kind  makes  it  worth  while  to 
meet  and  solve  whatever  difficulties  are  incident  to  its  introduction." 

Royal  Meeker:  "I  think  you  have  answered  all  difficulties. 
Your  scheme  seems  to  me  to  be  the  simplest  and  most  practical 
scheme  possible  to  be  devised.     I  most  heartily  endorse  your  plan." 

John  Perrin:  "Even  if  put  into  effect  for  this  country  alone 
upon  the  basis  of  one  of  our  present  imperfectly  constructed  index 
numbers,  it  would  obviously  eliminate  largely  the  fluctuating  value 
of  the  dollar  which  now  injects  such  uncertainty  into  all  our  dealings. 
The  direct  and  collateral  benefits  from  such  a  result  are  almost 
beyond  conception." 

Roger  W.  Babson:  "Your  only  critics  are  those  who  misunder- 
stand you." 

Sir  David  M.  Barbour:  "I  think  it  likely  that  some  such  system 
may  ultimately  be  adopted." 

The  American  Economic  Association  Committee  on 
the  Purchasing  Power  of  Money,  consisting  of  econo- 
mists who  have  chiefly  worked  in  the  field  of  Currency 
and  Banking  (i.e.  Professor  B.  M.  Anderson,  Jr.,  Pro- 
fessor E.  W.  Kemmerer,  Dr.  Royal  Meeker,  Professor 
Wesley  Clair  Mitchell,  Professor  Warren  M.  Persons, 
and  Professor  Irving  Fisher) ,  studied  the  plan  with  care 
and  expressed  itself  as  follows : 

"The  Committee  regards  the  stabilizing  of  the  value  of  monetary 
units  under  international  agreement  as  desirable  and  economically 


276  STABILIZING   THE    DOLLAR  [App.  IV 

feasible.  The  details  of  the  plan,  the  time  of  its  introduction,  and 
the  question  whether  international  agreement  is  indispensable, 
should  receive  the  immediate  attention  of  statesmen  and  econo- 
mists." 

The  Bridgeport  Chamber  of  Commerce  appointed  a 
committee,  the  report  of  which  was  adopted,  and  from 
which  report  I  quote : 

"Resolved:  That  the  Bridgeport  Chamber  of  Commerce, 
recognizing  the  many  evils  that  flow  from  the  ever-changing  value 
of  the  dollar,  hereby  calls  upon  Congress  to  enact  such  legislation, 
if  it  be  feasible,  as  shall  tend  to  make  the  dollar  stable  at  all  times 
in  its  purchasing  power ;  and  to  that  end  it  respectfully  recommends 
the  adoption,  in  substantial  form,  of  the  plan  put  forward  by 
Professor  Irving  Fisher  for  stabilizing  the  dollar  by  adding  weight 
thereto  or  subtracting  therefrom  in  accordance  with  the  fluctuations 
of  prices  as  represented  by  the  index  numbers." 

The  Waterbury  Chamber  of  Commerce  adopted  a 
similar  report,  of  which  the  chief  paragraph  reads : 

"Therefore,  Be  It  Resolved,  that  The  Waterbury  Chamber 
of  Commerce  records  itself  as  in  favor  of  the  enactment  by  Congress 
of  such  legislation  as  is  necessary  to  put  Professor  Fisher's  plan  into 
operation." 

The  Society  of  Pohsh  Engineers  and  Merchants  in 
America  passed  the  following  resolution : 

"After  a  thorough  discussion  of  the  lecture  by  Professor  Irving 
Fisher,  the  members  of  the  Society  of  Polish  Engineers  and  Mer- 
chants and  their  guests  present  at  this  meeting,  agree  with  him 
unanimously  in  the  soundness  of  his  theory  and  propose  that  the 
Board  of  Directors  of  the  Society  of  Polish  Engineers  and  Merchants 
take  the  necessary  steps  to  foster  tliis  idea  in  Poland." 

The  New  England  Association  of  Purchasing  Agents 
resolved : 

"that  we,  the  New  England  Association  of  Purchasing  Agents, 
record  our  earnest  belief  that,  in  the  interests  of  sound  business, 
and  justice  between  contracting  parties,  the  purchasing  power  of  the 
dollar  should  be  stabilized,  either,  as  we  believe  has  been  shown  to 
be  feasible,  by  varying  the  weight  of  gold  in  the  dollar,  or  by  such 
other  means  as  may  be  found  by  Congress  most  expedient." 


Sec.  3]  PUBLIC   INTEREST  277 

In  Article  10  of  the  International  Trade  Union  Con- 
ference at  Berne,  February,  1919,  it  was  resolved  that : 

"the  contracting  States  shall  call  as  soon  as  possible  an  inter- 
national conference  instructed  to  take  effective  measures  to  prevent 
the  depreciation  of  the  purchasing  power  of  wages  and  to  insure 
their  payment  in  a  non-depreciated  money." 

The  American  Federation  of  Labor  resolved : 

"That  the  Executive  Council  be  and  is  hereby  instructed  to 
make  a  study  of  the  problem  of  establishing  a  dollar  of  stabilized 
purchasing  power  as  it  may  be  presented  tlu"ough  legislative  effort, 
or  otherwdse  during  the  year,  and  to  submit  a  report  upon  the  subject 
at  the  1920  convention." 

Mr.  Husted  of  New  York  introduced  a  bill  in  the 
House  of  Representatives  on  Oct.  6,  1919,  to  create  a 
National  Monetary  Commission : 

"...  to  inquire  into  and  report  to  Congress  at  the  earliest  date 
practicable  what  changes  are  necessary  or  desirable  in  the  monetary 
system  of  the  United  States  or  in  the  laws  relating  to  banking  and 
currency,  and  especially  to  the  end  that  the  purchasing  power  of 
the  dollar  may  be  stabihzed  .  .  .  ." 

In  short,  a  considerable  sentiment  for  stabihzing 
the  dollar  already  exists,  and  there  is  much  more, 
latent  or  in  solution,  which  is  ready  to  be  precipi- 
tated. 

I  place  emphasis  on  the  fact  that  so  many  able  and 
practical  men  have  already  expressed  emphatic  approv- 
al of  the  plan  because  it  will  be  through  the  leader- 
ship of  such  men  that  public  sentiment  for  stabilizing 
the  dollar  will  grow  and  the  great  and  only  obstacle 
of  inertia  be  overcome. 

Inertia  is  a  dangerous  state  of  mind  when  effective 
and  far-reaching  action  is  sorely  needed,  as  at  present. 

If  the  question  of  stabilization  is  not  faced  and 
solved  in  an  impartial  and  scientific  spirit,  we  ought  not 
to  be  surprised  if  it  should  become  the  bone  of  conten- 
tion of  special  interests  or  if  specious  but  unsound 
monetary  schemes  should  again  find  a  hearing. 


278  STABILIZING   THE    DOLLAR  [App.  IV 

If  the  price  level  is  left,  as  it  always  has  been,  to 
chance,  the  grave  evils  of  this  policy,  or  lack  of  policy, 
may  be  greater  in  the  future  than  they  have  been  in 
the  past,  because  of  the  already  inflamed  or  Bolshevist 
condition  of  the  pubhc  mind. 

In  short,  we  now  hold  the  future  prosperity  and 
stability  of  the  world  in  our  hands.  The  situation, 
both  as  to  the  price  level  and  as  to  pubhc  interest  in 
the  price  level,  is  such  that  we  have  a  rare  opportunity 
to  take  a  new  step  forward  in  our  economic  life,  a 
radical  step  to  be  sure  but  one  which  will  save  us,  as 
nothing  else  can,  from  the  dangerous  radicalism  with 
which  we  are  now  threatened. 


APPENDIX  V 

PRECEDENTS 

I.   Contracts  in  Terms  of  a  Commodity 

In  Appendix  IV  we  have  seen  many  examples  of  dis- 
content growing  out  of  the  instabihty  of  monetary 
standards.  Such  discontent  has  often  expressed  itself 
in  action  —  sometimes  wise  and  sometimes  unwise. 

In  the  present  Appendix,  examples  will  be  noted  of 
intelligent  attempts  to  meet  the  evils  of  monetary 
instability.  These  attempts  are  more  numerous  than 
is  usually  realized  and  constitute  a  surprising  mass  of 
precedent  for  every  one  of  the  principles  of  stabiliza- 
tion which,  together,  constitute  the  proposal  of  this 
book. 

I  shall  begin  with  the  simplest  mode  of  escape  from  an 
unsatisfactory  monetary  standard.  This  is  to  make 
our  contracts  in  terms  of  some  staple  commodity,  like 
wheat  or  iron. 

Professor  Ferguson  of  Bryn  Mawr  tells  me  that : 
"  In  Roman  times  in  Egypt,  as  well  as  previously 
under  the  Ptolemies,  a  large  number  of  contracts 
show  that  wheat  was  used  in  paying  rent  on  farm 
land,  or,  if  the  tenant  preferred,  coin  (usually  copper 
drachmas)  to  the  amount  equivalent  to  the  value  of 
wheat." 

In  England,  the  "  tithe  averages  "  have  been  made 
to  vary  with  the  value  of  grain,  so  that  the  tithe  was, 
in  effect,  so  much  grain,  not  so  much  money ;  or 
rather  it  was  money  measured  by  grain.  Another  ex- 
cellent example  is  the  ''Scotch  Fiars  prices"  previously 
mentioned  in  another  connection.     These  have  existed 

279 


280  STABILIZING   THE    DOLLAR  [App.  V 

for  more  than  two  centuries.  Rents  of  farm  land  are 
contracted  for  in  terms  of  grain  but  paid  for  in  money 
at  the  average  price  of  the  grain  as  judicially  determined. 

In  the  reign  of  Queen  Elizabeth  a  statute  was  passed 
requiring  that  one  third  of  the  rental  of  college  lands 
should  be  expressed  in  wheat  or  malt.  Blackstone, 
commenting  on  this  law  two  centuries  afterwards, 
observed  that  the  one  third  in  wheat  or  malt  rent 
had  come  to  be  generally  worth  twice  as  much  as  the 
two  thirds  in  money  !  This  saved,  for  the  colleges 
of  England,  a  very  important  part  of  their  revenues 
which  would  otherwise  have  become  dissipated  by  the 
depreciation  of  money. 

Of  these  acts.  Professor  Jevons  says/  "  The  ques- 
tion arises  whether,  having  regard  to  these  extreme 
changes  in  the  value  of  the  precious  metals,  it  is  de- 
sirable to  employ  them  as  the  standard  of  value  in  long 
lasting  contracts.  We  are  forced  to  admit  that  the 
statesmen  of  Queen  Elizabeth  were  far-seeing." 

Mr.  C.  W.  Barron  of  the  Boston  News  Bureau  and 
the  Wall  Street  Journal  has  supplied  me  with  a  more 
modern  instance  :  On  September  8,  1817,  David  Sears, 
of  Boston,  leased  to  Uriah  Cutting,  of  Boston,  for  1000 
years  from  December  1,  1817,  at  a  yearly  rental  of  10 
tons  of  First  Quality  of  Russia  Sables  Iron,  the  land 
and  building  thereon  at  the  northeast  corner  of 
ScoUay  Square  and  Court  Street.  Similar  leases 
were  executed  at  the  time  by  the  same  parties  on 
eleven  other  pieces  of  property.  In  each  lease  the 
rental  is  actually  payable  in  money  equal  in  value  to 
the  specified  amount  of  iron. 

2.   The  Tabular  Standard 

Instances  have  come  to  light  of  contracts  based 
on  more  than  one  commodity,  thus  involving  the  very 
principle  of  the  index  number  or  "  tabular  standard." 

Twice  in  the  Colonial  history  of  Massachusetts  — 

1  In  his  Money  and  the  Mechanism  of  Exchange,  p.  326. 


Sec.  2]  PRECEDENTS  281 

once  in  1747  and  again  in  1780  —  a  tabular  standard 
was  created  by  law  for  the  payment  of  soldiers  and 
others  as  a  means  of  combating  the  extreme  uncer- 
tainty and  depreciation  of  paper  money. 

The  latter  law  lasted  till  1786  when  the  extreme  need 
of  such  a  corrective  was  over.  The  correction  was 
based  on  a  crude  index  number  of  four  commodities.^ 

Most  of  the  foregoing  facts  regarding  Massachusetts 
are  taken  from  an  interesting  account  of  these  early 
experiments  with  the  tabular  standard  by  Profes- 
sor Willard  Fisher. ^  These  early  gropings  toward  a 
goods  standard  were  due  to  the  dissatisfaction,  men- 
tioned in  Appendix  IV,  §  1,  following  the  disorganiza- 
tion of  monetary  standards  by  the  Revolutionary 
War. 

The  Great  War,  also,  has  driven  the  industrial  world 
to  the  use  of  a  composite  standard,  though  in  a  dif- 
ferent way.  Wage  payments  have,  for  the  first  time, 
so  far  as  I  know,  been  adjusted  by  means  of  index 
numbers  of  prices. 

At  the  close  of  1916  several  banks,  trust  companies, 
and  commercial  and  industrial  establishments  made 
special  Christmas  presents  to  their  employees  to  com- 
pensate partially  for  the  reduced  purchasing  power  of 
their  salaries  for  the  preceding  year,  the  presents 
being  a  fixed  percentage  of  the  salaries. 

1  The  State  issued  its  notes  on  this  basis:  "Both  Principal  and 
Interest  to  be  paid  in  the  then  current  Money  of  said  State,  in  a 
greater  or  less  Sum,  according  as  Five  Bushels  of  CORN,  Sixty- 
eight  Pounds  and  four-seventh  Parts  of  a  Pound  of  BEEF,  Ten 
Pounds  of  SHEEP'S  WOOL,  and  Sixteen  Pounds  of  SOLE 
LEATHER  shall  then  cost,  more  or  less  than  One  Hundred  and 
Thirty  Pounds  current  Money,  at  the  then  current  Prices  of  the 
said  Articles." 

The  same  principle  was  applied  to  the  payment  of  sums  due  the 
President  of  Harvard  College. 

This  early  example  is  particularly  interesting  because  it  antic- 
ipated those  economists  who  are  usually  credited  Avith  originating 
the  idea  of  a  tabular  standard,  namely  Sir  George  Shuckburgh 
Evelyn,  1798,  Count  Soden,  1805,  Arthur  Young,  1811,  Joseph  Lowe, 
1822. 

2  "The  Tabular  Standard  in  Massachusetts,"  Quarlerly  Journal 
of  Economics,  May,  1913. 


282  STABILIZING   THE    DOLLAR  [App.  V 

Apparently  most  employers  who  made  such  adjust- 
ments assumed,  at  first,  that  they  were  made  once  for 
all.  But  it  was  found,  of  course,  that  living  costs 
wouldn't  "  stay  put,"  so  that  a  new  adjustment  needed 
to  be  made  next  year.  This  led  naturally  to  the  idea 
of  a  periodical  adjustment.  The  Bankers'  Trust  Co., 
which  had  made  one  adjustment,  appointed  a  com- 
mittee to  make  further  investigation.  Its  report, 
made  December  15,  1917,  covered  22  pages. 

The  Oneida  Community  inaugurated,  on  January  1, 
1917,  a  system  of  compensation  for  the  high  cost  of 
Hving  by  the  use  of  Bradstreet's  index  number  for 
wholesale  prices.  Each  workman  receives  two  weekly 
pay  envelopes  —  one  containing  regular  wages  and 
the  other  containing  a  certain  percentage  thereof 
calculated  from  Bradstreet's  number.  An  initial  ad- 
justment of  16  per  cent  was  made  as  representing  the 
increase  in  the  cost  of  living  between  January  1,  1916 
(when  the  general  wage  scale  had  been  revised),  and 
January  1,  1917.  This  16  per  cent  was  appUed  to  the 
wages  for  the  first  month.  In  each  succeeding  month 
a  1  per  cent  advance  or  decline  of  wages  was  made 
for  each  20  points  change  in  the  Bradstreet  number. 

The  Kelley-How-Thomson  Co.  (hardware),  of  Du- 
luth,  Minnesota,  adopted,  independently,  a  similar 
plan. 

The  George  Worthington  Co.  (hardware),  of  Cleve- 
land, Ohio,  on  October  1,  1917,  followed  the  lead  of 
the  Oneida  Community,  with  the  exception  that  all 
employees  were  included  excepting  the  directors  or 
salesmen  on  a  commission  basis. 

The  Printz-Biederman  Co.  (clothing),  also  of  Cleve- 
land, received  the  idea  from  the  George  Worthington 
Co.  The  introduction  of  the  plan  here  was  through 
the  employees'  organization. 

The  Mishawaka  Woolen  Mfg.  Co.,  of  Mishawaka, 
Indiana ;  and  the  Union  Bleaching  &  Finishing  Co.  of 
Greenville,  South  CaroUna,  both  pay  wages  on  the 
basis  of  index  numbers. 


Sec.  2]  PRECEDENTS  283 

The  Index  Visible,  Inc.,  of  New  Haven,  Connecticut, 
adopted  a  simpler  plan  based  on  the  index  number  of 
retail  prices  of  the  United  States  Bureau  of  Labor 
Statistics. 

Various  flouring  mills  in  Seattle  and  other  points  in 
the  Northwest  have  raised  the  wages  of  their  employees 
on  several  occasions.  The  adjustments  were  made  at 
irregular  intervals,  but  consciously  to  meet  the  in- 
crease in  living  costs.  The  survey  of  prices  on  which 
the  increase  was  determined  was  made  under  the  direc- 
tion of  Professor  W.  F.  Ogburn,  now  of  Columbia 
University,  who  calculated  the  index  figures  finally  used. 
The  minimum  wage  laws  in  Oregon  and  Washington 
were  also  revised  in  accordance  with  the  increased 
cost  of  living. 

The  chief  use  of  index  numbers  in  settling  wage  dis- 
putes was  in  the  decisions  of  the  National  War  Labor 
Board.  Strikes  have  been  settled  and  wage  increases 
made  specifically  on  the  basis  of  index  numbers. 

The  principle  was  also  recognized  by  the  Shipbuilding 
Labor  Adjustment  Board.  This  board  adopted  the 
plan  of  making  half  yearly  (April  1  and  October  1) 
adjustments  of  wages  in  all  shipbuilding  centers,  based 
on  changes  in  the  cost  of  living  as  determined  for  the 
Board  by  the  United  States  Bureau  of  Labor  Statistics. 

Another  application  of  index  numbers  is  by  the  War 
Department,  which  in  fixing  the  prices  at  which  it  dis- 
poses of  its  machine  tools  is  proposing  to  use  an  index 
number,  among  other  factors,  to  adjust  the  present 
prices  of  sale  to  the  original  cost,  or  price  of  purchase. 

In  England,  the  employees  in  several  branches  of 
the  textile  trade  drew  up  an  agreement  with  their  em- 
ployers in  January,  1918,  canceling  all  previous  war 
bonuses  and  establishing  the  regulation  of  wages  by  the 
index  number  of  the  cost  of  living  as  calculated  by  the 
Board  of  Trade. 

The  same  principle  of  adjusting  wages  to  the  high 
cost  of  living  has  been  applied  in  Australia. 

Some  of  the  expedients  cited  are  in  permanent  use  ; 


284  STABILIZING   THE    DOLLAR  [App.  V 

others  were  given  up  when  the  special  occasions  giving 
them  rise  were  over. 

The  reason  for  discontinuing  these  makeshifts  was, 
in  each  case,  the  great  inconvenience  caused  by  having 
two  standards  to  deal  with.  Theoretically,  of  course, 
we  could  use  the  index  number  to  correct  every  con- 
tract just  as  it  has  been  used  to  correct  wage  contracts, 
—  consulting  the  index  number  for  adjusting  our  rent 
or  interest  payments  or  trolley  carfares,  for  instance. 
But  this  would  not  be  practicable,  certainly  not 
through  voluntary  adoption  by  individuals. 

3.   Correcting  the  Money  Unit  Itself 

There  are  instances  of  legislative  action,  intended  to 
correct  the  money  unit  itself,  but  falling  short  of  the 
action  proposed  in  this  book.  Probably  the  best  ex- 
ample of  such  correction  in  current  money  units  them- 
selves is  the  "  gold  exchange  standard,"  whereby  the 
silver  standard  countries  have  virtually  converted 
their  silver  units  into  gold.  After  the  breakdown  of 
bimetalUsm  about  1873,  when  gold  and  silver  countries 
began  to  drift  apart,  London  exchange  on  India  ceased 
to  have  any  par.  Consequently  its  fluctuations  in- 
creased and  caused  great  inconvenience  to  traders  be- 
tween the  two  countries.  Finally,  in  1893,  the  Indian 
Government  stopped  the  free  coinage  of  silver,  giving 
the  Indian  rupee  a  scarcity  value  and  causing  it  to 
appreciate  above  the  value  of  the  silver  it  contained. 
It  was  allowed  to  appreciate  until  it  became  worth  IQd, 
at  which  it  became  virtually  redeemable  in  gold,  or, 
more  strictly,  in  the  right  to  gold,  situated,  not  in  India, 
but  in  London.  This  device,  of  redeeming  silver  in 
India,  in  "  exchange  "  on  gold  in  London  constituted 
the  famous  "  gold  exchange  standard."  At  the  time 
of  its  adoption,  the  gold  exchange  standard  was 
probably  as  radical  a  departure  from  tradition  as  a 
stabilized  dollar  would  be  to-day. 

The  Great  War  has  brought  two  crude  attempts  at 
safeguarding  the  money  of  a  country  against  alternate 


Sec.  4]  PRECEDENTS  285 

inflation  and  contraction.  These  are  the  prohibition 
of  import  and  of  export  of  gold.  Sweden,  in  1916,  de- 
fended herself  from  the  golden  flood  which  the  war 
brought  by  stopping  its  import,  i.e.  she  authorized  her 
State  Bank  to  refuse  to  accept  gold  for  notes,  and  this 
brought  the  same  results  as  did  the  stoppage  in  India 
of  the  free  coinage  of  silver  in  1893.  Swedish  money- 
received  a  scarcity  value,  and  depreciation  in  terms  of 
commodities  was  checked  ;  that  is,  the  rise  of  prices  was 
arrested.^  Holland  and  Spain  did  much  the  same  thing. 
We,  as  well  as  practically  all  other  nations,  defended 
ourselves  against  a  possible  sudden  drain  of  gold  by 
putting  an  embargo  on  its  export. 

4.   Conclusion 

We  see,  then,  that  precedents  exist  for :  (1)  setting 
up  a  commodity  standard  to  replace  the  standard  of 
a  mere  money  metal,  (2)  employing  an  index  number 
for  that  purpose,  (3)  correcting  a  money  metal  standard 
{e.g.  silver  by  the  gold  exchange  standard)  through  a 
sliding  scale  relation  to  another  standard. 

These  are  precisely  the  essentials  of  the  plan  to 
stabilize  the  dollar. 

There  is  therefore  no  element  of  innovation  con- 
tained in  the  plan  to  stabilize  the  dollar.  The  only 
innovation  is  combining  previously  tested  elements 
into  one  complete  whole.  At  the  same  time  we  retain 
our  traditional  gold  as  the  fundamental  money  and 
make  no  visible  change  in  the  money  in  use.  The  only 
essential  departure  from  the  system  we  now  have  is 
one  quite  invisible  to  all  but  a  few  miners,  jewelers, 
exporters  and  importers,  namely,  varying,  by  a  fixed 
rule,  the  price  of  gold  from  the  present  $20.67  an 
ounce.  It  is  hard  to  see  why  such  a  change,  the  only 
object  of  which  is  to  prevent  any  real  change  in  our 
monetary  unit,  should  be  feared  by  the  veriest  wor- 
shiper of  precedent. 

'  Swedish  Exchange  rose,  and  (what  was  one  of  the  most  curious 
results)  Swedish  notes  commanded  a  premium  in  gold  bullion. 


.    APPENDIX  VI 

BIBLIOGRAPHY 

I.   Some  of  the  Chief  Index  Numbers  Current 

United  States 

U.  S.  Bureau  of  Labor  Statistics.  Wholesale.  For  period  beginning 
1890.  Published  annually  in  separate  bulletins.  Figures  by 
years  and  (beginning  1900)  months.  Number  of  commodities 
now  296. 

U.  S.  Bureau  of  Labor  Statistics.  Retail.  For  period  beginning 
1907.  Published  at  intervals  in  separate  bulletins.  Figures 
by  yearsand  (beginning  1913)  months.  Numberof  commodities 
22  (foods). 

Bradstreet's,  New  York  City.  Wholesale.  For  period  beginning 
1892  (as  now  published).  Published  monthly.  The  index  num- 
ber is  found  by  adding  the  prices  per  pound  of  96  commodities. 

Dun's,  New  York  City.  Wholesale.  For  period  beginning  1860.  Pub- 
lished monthly.  Number  of  commodities  about  200,  as  reck- 
oned. The  exact  method  of  computation  has  never  been  pub- 
lished. 

The  Neiv  York  Times  Annalist.  Wholesale.  For  period  beginning 
1913.  Published  weekly  (diagram).  Number  of  commodi- 
ties 25  (foods). 

Gibson's,  New  York  City.  Wholesale.  For  period  beginning  1912. 
Published  weekly  (market  letter).  Number  of  commodities 
22  (foods). 

Canada 

Department  of  Labour.  Wholesale.  For  period  beginning  1890. 
Published  in  the  annual  reports  of  the  Department  and  monthly 
in  the  Labour  Gazette,  its  official  organ.  Number  of  com- 
modities 271. 

Department  of  Labour.  Retail.  For  period  beginning  1900.  Pub- 
lished monthly  in  the  Labour  Gazette.  In  1900  and  1905  index 
number  given  for  December  only;  1913-1916,  by  years; 
1914-1916,  for  August ;  beginning  July,  1917,  monthly.  Num- 
ber of  commodities  30  (foods). 

286 


Sec.  1]  BIBLIOGRAPHY  287 

Great  Britain 

British  Board  of  Trade.  Wholesale.  For  period  beginning  1871. 
First  published  in  a  report  of  1903  (with  chart  for  1801-1902 
joining  index  numbers  of  Jevons  (1801-1846),  Sauerbeck  (1846- 
1871),  and  Board  of  Trade).  Continued  annually  in  the  January 
number  of  the  official  Labour  Gazette.  Based  in  part  on 
declarations  of  importers  and  exporters,  and  on  contract  prices 
at  hospitals  and  institutions.     Number  of  commodities  47. 

British  Board  of  Trade.  Retail.  For  period  beginning  July,  1914. 
Published  montlily  in  the  official  Labour  Gazette  with  corre- 
sponding figures  for  other  countries.  Number  of  commodities 
23  (foods). 

Economist.  Wholesale.  For  period  beginning  1851.  Published 
monthly  in  the  weekly  journal  of  that  name  and  compiled 
annually  in  the  first  January  issue.  Number  of  commodities 
now  44. 

Sauerbeck-Statist.  Wholesale.  For  period  beginning  1846.  Now 
published  monthly  in  the  Statist,  London,  with  yearly  resume 
in  the  March  number  of  the  Journal  of  the  Royal  Statistical 
Society.     Number  of  commodities  45. 

France 

Annuaire  Statistique.  WTiolesale.  For  period  beginning  1857. 
Published  annually  in  the  Annuaire  Statistique  de  la  France. 
Number  of  commodities  45. 

For  more  complete  lists  and  descriptions  of  current,  as  well  as  of 
discontinued,  index  numbers  see  : 

U.  S.  Bureau  of  Labor  Statistics.     Bulletin  173,  Index  Numbers  of 

Wholesale  Prices  in  the  United  States  and  Foreign  Countries. 

1915. 
J.  Lawrence  Laughlin.     Principles  of  Money,  pp.  142-224.     Scrib- 

ners,   1903. 
Bulletin,  Institute  internationale  de  statistique,  tome  XIX,  ]i\Taison  3, 

pp.  124-244.     Paris,  1911. 
U.  S.  Library  of  Congress.     Select  list  of  references  on  the  cost  of 

living  and  prices,  1910.     Also :    Additional  references  on  the 

cost  of  living  and  prices,  1912. 
************ 

For  application  of  index  numbers  to  war  prices  in  different  coun- 
tries see : 

Wesley  Clair  Mitchell.  International  Price  Comparisons.  War 
Industries  Board.    Price  Bulletin  No.  2.    1919. 


288  STABILIZING   THE    DOLLAR  [App.  VI 

2.  Some  of  the  Chief  Writings  on  the  Principles 
of  Index  Numbers 

William  Stanley  Jevons.  Investigations  in  currency  and  finance. 
Sections  II-IV,  pp.  13-150,  give  an  index  number  computed 
from  39  articles  from  1782  to  1865.  London,  1909.  (Re- 
prints of  various  articles  published  earlier.) 

F.  Y.  Edgeworth.     Reports  of  the  Committee  (of  the  British  Asso- 

ciation for  the  Advancement  of  Science)  appointed  for  the 
purpose  of  investigating  the  best  methods  of  ascertaining  and 
measuring  variations  in  the  value  of  the  monetary  stand- 
ard. In  Reports  of  the  Association  for  1887,  pp.  247-301 ;  1888, 
pp.  188-219;  1889,  pp.  133-164. 
Correa  Moylan  Walsh.  The  measurement  of  general  exchange- 
value.     580  pp.     Macmillan,  1901. 

G.  H.  Knibbs.     Prices,  Price  Indexes,  and  Cost  of  Living  in  Aus- 

tralia. Commonwealth  Bureau  of  Census  and  Statistics, 
Labour  and  Industrial  Branch,  Report  No.  1,  Appendix. 
McCarron,  Bird  &  Co.,  Melbourne.     December,  1912. 

G.  H.  Knibbs.  Price  Indexes,  their  Nature  and  Limitations,  the 
Technique  of  Computing  them,  and  their  Application  in  Ascer- 
taining the  Purchasing-Power  of  Money.  Commonwealth 
Bureau  of  Census  and  Statistics,  Labour  and  Industrial 
Branch,  Report  No.  9.  McCarron,  Bird  &  Co.,  Melbourne. 
1918. 

Irving  Fisher.  The  Purchasing  Power  of  Money,  Chapter  10  and 
Appendix  to  Chapter  10.     Macmillan,  1911. 

Wesley  Clair  Mitchell.  The  Making  and  Using  of  Index  Numbers, 
U.  S.  Bureau  of  Labor  Statistics,  Bulletin  No.  173,  pp.  5-114, 
1915. 


3.   Remote  Anticipations  of  the  Plan  to 
Stabilize  the  Dollar 

A.  Bimetallism.  There  would  be  little  use,  even 
if  it  were  possible,  to  include  all  writings  which  touch 
on  the  need  for  combating  the  instability  of  monetary 
standards.  I  shall,  therefore,  merely  run  over,  very 
briefly,  the  proposals  which  anticipate  only  remotely 
the  proposal  of  this  book.     These  fall  under  four  heads  : 

Bimetallism  and  other  schemes  for  combining  the 
precious  metals. 

The  Gold  Exchange  Standard. 


Sec.  3]  BIBLIOGRAPHY  289 

Irredeemable  Paper  Money,  the  quantity  to  be  regu- 
lated by  reference  to  the  tabular  standard. 

The  Tabular  Standard. 

In  this  subsection  A  will  be  considered  the  first  of  these. 

The  literature  on  bimetallism  is,  of  course,  enormous. 
Bibliographies  were  published  in  the  '90s  by  Soetbeer 
and  others.  The  nature  of  the  proposal,  including 
the  claim  that  it  would  stabilize  the  price  level,  is  well 
set  forth  in  Francis  A,  Walker's  International  Bimetal- 
lism, N.  Y.,  Holt,  1896,  and  Major  Leonard  Darwin's 
Bimetallism,  London,  Murray,  1897. 

That  bimetallism  would  work  under  certain  circum- 
stances but  would  break  down  under  certain  other 
circumstances  has  been  shown  by  Irving  Fisher,  in 
"  Mechanics  of  Bimetallism,"  Economic  Journal,  Sept. 
1899,  pp.  527-537. 

Professor  F.  Y.  Edgeworth  has  shown  that  bimetal- 
lism would,  on  the  theory  of  probability,  have  only  a 
slight  influence  toward  stabilization  and  that  "sym- 
metallism"  would  be  somewhat  more  stable  than 
bimetallism.  ("  Thoughts  on  Monetary  Reform," 
Economic  Journal,  Sept.  1895,  pp.  434-451.) 

What  Professor  Edgeworth  named  "  symmetallism  " 
is  a  method  first  proposed,  apparently,  by  Professor 
Alfred  Marshall  ^  for  joining  two  metals  virtually  in  a 
joint  coin,  obviating  the  danger  of  a  breakdown  to 
which  bimetallism  is  always  subject. 

Other  proposals  of  this  sort  for  joining  two  metals 
have  been  made,  e.g.  by  Dr.  Theodor  Hertzka  in  Das 
Internationale  Wahrungsproblem  und  dessen  Losung, 
1892,  and  Mr.  A.  P.  Stokes  in  Joint  Metallism,  1894. 
L^on  Walras,  in  Theorie  de  la  Monnaie,  Lausanne, 
1886,  advocates,  rather  than  bimetallism,  a  system  of 
gold  money  with  a  variable  amount  of  silver  bullion 
to  be  issued  or  recalled  as  a  "  regulator." 

B.  Gold  Exchange  Standard.  The  idea  of  the  gold 
exchange  standard  was,  apparently,  first  proposed  in 

1  Evidence  before  the  Gold  and  Silver  Commission  (1888)  Q.  9,  837  ; 
and  "Principles  of  Economics,"  Book  V,  ch.  6. 


290  STABILIZING   THE   DOLLAR  [App.  VI 

1876  by  A.  M.  Lindsay,  treasurer  of  the  Bank  of  Bengal. 
The  idea  was  suggested  to  him  by  reading  Ricardo's 
Proposals  for  an  Economical  and  Secure  Currency.^ 
Lindsay  pubhshed  a  pamphlet  on  the  subject  in  1892 
entitled  Ricardo^s  Exchange  Remedy,  a  Proposal  to 
Regulate  the  Indian  Currency  by  Making  it  Expand  and 
Contract  Automatically  at  Fixed  Sterling  Rates  with  the 
Aid  of  the  Silver  Clause  of  the  Bank  Act.  London 
(Effingham,  Wilson  &  Co.),  36  pp. 

The  first  step  toward  applying  Lindsay's  idea  was 
taken  in  1893,  when,  as  a  consequence  of  the  work  of 
Sir  David  Barbour  and  the  other  members  of  the  Her- 
schell  Committee  on  Indian  Currency,  the  Indian  Mints 
were  closed  to  silver  and,  consequently,  the  rupee  was 
given  a  scarcity  value  above  that  of  its  contained  silver. 

The  second  step  was  taken  in  1898  when  a  gold  re- 
serve was  begun.  The  full-fledged  gold  exchange 
standard  was  first  put  in  force  in  1900,  when  rupees 
in  India  were  virtually  made  redeemable  in  gold  in 
London  through  bills  of  exchange  on  London. 

A  different  plan  for  preventing  money  in  silver  stand- 
ard countries  from  sinking  in  value  relatively  to  gold 
was  to  impose  a  seigniorage  on  silver  coinage  increas- 
ing as  the  price  of  silver  decreased.  This  proposal 
was  made  by  Henry  Coke  before  the  Herschell  Com- 
mittee in  1893  (§139).  In  principle,  it  is  nearer  the 
proposal  of  this  book  than  is  the  gold  exchange  stand- 
ard. 

Fuller  information  concerning  the  gold  exchange 
system  and  other  plans  of  currency  reform  will  be 
found  in  E.  W.  Kemmerer's  Modern  Currency  Reforms, 
Macmillan,   1916. 

C.  Irredeemable  Paper  Money.  This  dangerous  ex- 
pedient has  always  had  its  advocates,  and  these  have 

1  Ricardo's  plan,  however,  did  not  go  further  than  merely  to  propose 
abolishing  gold  coin  and  substituting  gold  bullion  as  a  reserve,  using 
paper  for  actual  circulation,  the  Government  to  sell  and  buy  gold, 
for  paper,  at  the  pleasure  of  the  public,  with  a  slight  margin  (11%) 
between  the  two  prices.  It  will  be  seen  that  Ricardo's  proposal  was 
like  that  of  this  book  except  that  the  prices  set  were  not  to  vary. 


Sec.  3]  BIBLIOGRAPHY  291 

usually  been  inflationists.  But  a  considerable  number 
have  proposed  a  paper  money  regulated  by  an  index 
number  of  prices.  Such  a  plan  is  in  purpose  similar 
to,  but  in  method  very  different  from,  the  proposal 
of  this  book.  The  essential  difference  is  that  between 
redeemability  and  irredeemability. 

Among  the  many  who  have  suggested  this  form  of 
monetary  system  are : 

Carl  Menger,  the  Austrian  economist,  who  suggested 
that  the  price  level  could  be  stabilized  by  the  issue  of 
paper  money,  as  required,  to  neutralize  fluctuations 
of  purchasing  power  ;  Charles  Gide,  who  in  Principles  of 
Political  Economy  (1883)  speaks  favorably  of  Menger's 
proposal,  but  favors  it  only  in  the  form  of  international 
paper  money ;  E.  Benjamin  Andrews,  An  Honest 
Dollar  (1889),  pp.  36-42;  Henry  Winn,  "The  Invari- 
able Dollar,"  The  Traveler,  Oct.  17,  1891;  Arthur 
Kitson,  "  A  Scientific  Solution  of  the  Money  Question," 
The  Arena,  1895 ;  Eltweed  Pomeroy,  "  The  Multiple 
Standard  for  Money,"  The  Arena,  Sept.  1897 ;  Frank 
Parsons,  "  Rational  Money  "  (1898),  who  would  effect 
the  expansion  or  contraction  of  currency  through  the  use 
of  call  bonds,  or  a  sUding  scale  of  interest  on  govern- 
ment loans,  etc.,  in  accordance  with  the  movement  of 
prices  [this  book  contains  a  discussion  of  most  of  the 
above  references  and  mentions  others] ;  Alfred  Russel 
Wallace,  "  Paper  Money  as  a  Standard  of  Value  "  (origi- 
nally in  The  Academy,  Dec.  31,  1898,  and  reprinted 
in  Studies,  Scientific  and  Social,  Vol.  II,  London,  1900). 

D.  The  Tabular  Standard.  This  has  been  described 
in  Appendix  III,  §6.  One  of  the  earliest  writers  on 
this  method  of  correcting  aberrations  in  the  monetary 
standard  was  Joseph  Lowe,  who,  in  his  Present  State 
of  England  in  Regard  to  Agriculture,  Trade  and  Fi- 
nance, Chap.  LX  (London,  1822),  proposed  "  to  correct 
the  legal  standard  of  value  (or  at  least,  to  afford  to 
individuals  the  means  of  ascertaining  its  errors),  by  the 
periodical  publication  of  an  authentic  price  current, 
containing  a  list  of  a  large  number  of  articles  in  general 


292  STABILIZING   THE    DOLLAR  [App.  VI 

use,  arranged  in  quantities  corresponding  to  their  rela- 
tive consumption,  so  as  to  give  the  rise  or  fall,  from 
time  to  time,  of  the  mean  of  prices ;  which  will  indi- 
cate, with  all  the  exactness  desirable  for  commercial 
purposes,  the  variations  in  the  value  of  money ;  and 
enable  individuals,  if  they  shall  think  fit,  to  regulate 
their  pecuniary  engagements  by  reference  to  this  tabu- 
lar standard.'" 

Another  writer  who  made  the  same  suggestion  was 
G.  Poulett  Scrope,  M.  P.,  An  Examination  of  the 
Bank  Charter  Question,  with  an  Inquiry  into  the  Nature 
of  a  Just  Standard  of  Value  (London,  1833),  p.  26,  and 
Principles  of  Political  Economy  (London,  1833),  p.  406. 

Another  was  Mr.  G.  R.  Porter,  The  Progress  of  the 
Nation  (Sections  III  and  IV,  p.  235).  He  added  a 
table  showing  the  average  fluctuations  of  fifty  com- 
modities monthly  during  the  years  1833  and  1837. 

W.  Stanley  Jevons  was  an  enthusiastic  advocate  of 
this  plan.  In  his  Money  and  the  Mechanism  of  Ex- 
change (London,  1893),  Chap.  XXV,  he  discusses  Lowe's, 
Scrope's,  and  Porter's  proposals,  and  comments  :  "  Such 
schemes  for  a  tabular  or  average  standard  of  value 
appear  to  be  perfectly  sound  and  highly  valuable  in 
a  theoretical  point  of  view,  and  the  practical  difficulties 
are  not  of  a  serious  character.  To  carry  Lowe's  and 
Scrope's  plans  into  effect,  a  permanent  government 
commission  would  have  to  be  created,  and  endowed 
with  a  kind  of  judicial  power.  The  officers  of  the  depart- 
ment would  collect  the  current  prices  of  commodities  in 
all  the  principal  markets  of  the  kingdom,  and,  by  a  well- 
defined  system  of  calculations,  would  compute  from 
these  data  the  average  variations  in  the  purchasing 
power  of  gold.  The  decisions  of  this  commission  would 
be  published  monthly,  and  payments  would  be  adjusted 
in  accordance  with  them." 

"  At  first  the  use  of  this  national  tabular  standard 
might  be  permissive,  so  that  it  could  be  enforced  only 
where  the  parties  to  the  contract  had  inserted  a  clause 
to  that  effect  in  their  contract.     After  the  practicabil- 


Sec.  4]  BIBLIOGRAPHY  293 

ity  and  utility  of  the  plan  had  become  sufficiently 
demonstrated,  it  might  be  made  compulsory,  in  the 
sense  that  every  money  debt  of,  say,  more  than  three 
months'  standing,  would  be  varied  according  to  the 
tabular  standard,  in  the  absence  of  an  express  provi- 
sion to  the  contrary." 

As  shown  in  Appendix  V,  §2,  plans  very  similar  to 
the  above  are  now  actually  employed  to  some  extent. 

4.   Direct  Anticipations 

We  next  cite  the  writings  which  describe  plans  sub- 
stantially like  that  proposed  in  this  book  {i.e.  plans 
for  adjusting  the  weight  of  gold  in  a  monetary  unit  by 
the  aid  of  an  index  number  of  prices)  and  which  were 
published  earlier  than  the  author's  Purchasing  Power 
of  Money.  For  others  who  anticipated  the  idea  but 
did  not  publish,  see  Preface. 

John  Rooke.  Inquiry  into  the  Principles  of  National  Wealth. 
Edinburgh,   1824. 

"The  regulation  of  the  new  system  is,  that  in  whatever  pro- 
portion the  general  and  annual  price  of  farm  labour  throughout 
the  kingdom  has  a  tendency  to  rise  or  fall,  that  rise  or  fall 
shall  be  counteracted  by  a  reverse  rise  or  fall  in  the  current 
price  of  the  gold  and  silver  coin,"  p.  221. 

"It  would  probably  be  advisable  to  discard  the  gold  coin  from 
circulation  almost  entirely,  and  employ  it  chiefly  as  the  grand 
corrector  of  the  value  of  bank  paper,"  p.  222. 

Simon  Newcomb.  The  Standard  of  Value.  The  North  American 
Review,  Sept.  1879,  pp.  234-237. 

"The  first  and  most  obvious  method  of  attaining  the  object 
is  to  issue  a  paper  currency  which  shall  be  redeemable,  not  in 
gold  dollars  of  fixed  weight,  but  in  such  quantities  of  gold  and 
silver  bullion  as  shall  suffice  to  make  the  required  purchases." 
[NeAvcomb  also  anticipated  the  device,  shown  in  Appendix  I, 
§5,  for  retaining  gold  coins  in  circulation,  if  desired.] 

Alfred  Marshall.  Remedies  for  Fluctuations  of  General  Prices. 
The  Contemporary  Review,  March,  1887,  p.  371,  footnote. 
[Marshall  gives  two  possible  plans  (neither  of  which  is  advo- 
cated). One  is  for  an  inconvertible  currency  to  be  issued  (by 
purchase  of  consols)  whenever  a  sovereign  is  worth  in  com- 
modities more  than  par  and  retired  (by  sale  of  consols)  when- 
ever it  is  worth  less.    The  other  is  for  a  convertible  currency, 


294  STABILIZING   THE   DOLLAR  [App.  VI 

each  £  note  being  redeemable  at  any  time  in  as  much  as  is  then 
worth  (in  commodities)  half  the  unit  together  with  as  much 
silver  as  is  worth  the  other  half. 
The  second  plan  is,  in  principle,  virtually  that  of  this  book.] 

Aneurin  Williayns.  A  "Fixed  Value  of  Bullion"  Standard  — 
A  proposal  for  preventing  general  fluctuations  in  trade.  Eco- 
nomic Journal  (London),  June,  1892,  pp.  280-289.  Discus- 
sion by  Sir  Robert  Giffen,  "Fancy  Monetary  Standards," 
ibid.,  pp.  463-471 ;  reply  by  Aneurin  Williams,  pp.  747-749. 
[The  proposal  here  made  is  practically  identical  \\ith  that  of 
this  book.] 

J.  Allen  Smith.  A  Multiple  Money  Standard.  The  Annals  of  the 
American  Academy  of  Political  and  Social  Science,  March 
1896,  pp.  1-60. 

[Smith  suggests  several  plans  for  stabilizing  the  purchasing 
power  of  monetary  units,  among  them  one  which,  in  all  essen- 
tials, is  identical  with  that  proposed  in  this  book.] 

D.  J.  Tinnes.  An  Ideal  Measure  of  Value.  The  Adrian  (Min- 
nesota) Guardian,  Nov.  16,  1896. 

[The  proposal  made  here  and  in  Mr.  Tinnes'  subsequent  pub- 
lications, mentioned  in  the  list  below,  is  practically  identical 
with  that  of  this  book.] 

5.  Recent  Writings  on  Stabilizing  the 
Dollar 

(Omitting  most  newspaper  and   minor  publications,  numbering 

about  a  thousand) 

Irving  Fisher.    The  Purchasing  Power  of  Money.    New  York, 

Macmillan,  1911,  Ch.  13. 
0.  M.  W.  Spragiie.  Fisher's  Purchasing  Power  of  Money.  Quarterly 

Journal  of  Economics,  Nov.  1911,  pp.  148-151. 
Irving  Fisher.     International  Conference  Regarding  the  Cost  of 

Living.     Report  before  Congress  of  Chambers  of  Commerce. 

Boston,  Sept.  1912,  reprinted  in  Independent,  Sept.  26,  1912, 

pp.  700-706. 
Commercial  and  Financial  Chronicle,  Editorial,  Oct.  5,  1912.     Re- 
plies by  Irving  Fisher  and  further  discussion,  Oct.  26,  and 

Nov.  16,  1912. 
Irving  Fisher.     Standardizing  the  Dollar  (replies  to  objections). 

New  York  Times,  Dec.  22,  1912. 
Irving  Fisher.     A  More  Stable  Gold  Standard.     Economic  Journal 

(London),  Dec.  1912,  pp.  570-576. 
William  F .  Blackman.     The  Increasing  Cost  of  Living;  Its  Cause 

and  Cure.     Rollins  College  Bulletin,  Dec.  1912. 
Lucien  March.     Un  Projet  de  Stabilization  des  Prix.     Communi- 


Sec.  5]  BIBLIOGRAPHY  295 

cation  a  la  Soci^td  de  Statistique  de  Paris,  le  15  Janvier,  1913, 
reprinted  from  its  journal,  pp.  10-24.  Discussion  by  Edmond 
Thery,  G.  Roulleau,  Aug.  Deschamps,  Adolphe  Landry, 
Lucien  March,  Irving  Fisher. 

Irving  Fisher.  A  Compensated  Dollar.  Quarterly  Journal  of  Eco- 
nomics, Feb.  1913,  pp.  213-235.     Appendices,  pp.  385-397. 

Irving  Fisher.  Standardizing  the  Dollar.  American  Economic 
Review  Supplement,  March  1913,  pp.  20-28.  Discussion 
by  Nat.  C.  Murray,  Albert  C.  Whitaker,  Willard  C.  Fisher, 
O.  M.  W.  Sprague,  B.  M.  Anderson,  Jr.,  R.  R.  Bowker,  E.  W. 
Kemmerer,  and  Irving  Fisher,  ibid.,  pp.  29-51. 

David  Kinky.  Objections  to  a  Monetary  Standard  Based  on 
Index  Numbers.  American  Economic  Review,  March  1913, 
pp.  1-19. 

Augusto  Graziani.     Di  una  nuova  proposta  per  rendere  piu  stabile 
il  valore  della  moneta.     Reale  Instituto  d'Incoraggiamento 
di  Napoli.     Nota  letta  nella  tornata  del  6  marzo  1913. 
(Napoli,  Cooperative  Tipografica,  1913.) 

Peyton  R.  Anness.  The  Compensated  Dollar.  Yale  Scientific 
Montldy,  March  1913. 

Corrado  Gini.  L'equazione  dello  scambio  e  il  potere  di  acquisito 
della  moneta.  Revista  Italiana  di  Sociologia,  Rome,  Anno 
XVII,  Fasc.  II  (March-April  1913). 

E.  B.   Wilson.     Review    of    the    Purchasing    Power    of    Money. 

Science,  May  16,  1913,  pp.  761-763. 

F.  W.  Taussig.     The  Plan  for  a  Compensated  Dollar.     Quarterly 

Journal  of  Economics,  May  1913,  pp.  401-416. 

F.  Zeuthen.     Irving  Fisher's  Forslag  til  Prisniveauets  Stabilisering. 

National okonomisk  Tidskrift  (Copenhagen),  Hefte  4  (July- 
Aug.,  1913),  pp.  350-364. 

Irving  Fisher.  What  an  International  Conference  on  the  High 
Cost  of  Living  Could  Do.  Institut  International  de  Statis- 
tique, Vienna,  XIV®  Session,  Rapports,  no.  25,  Sept.  1913. 

J.  M.  Clark.  Possible  Complications  of  the  Compensated  Dollar. 
American  Economic  Review,  Sept.  1913,  pp.  576-588. 

E.  M.  Patterson.  Objections  to  a  Compensated  Dollar.  American 
Economic  Review,  Sept.  1913,  pp.  863-875. 

Irving  Fisher.  La  Hausse  Actuelle  de  la  Monnaie,  du  Credit  et 
des  Prix,  Comment  y  Remedier.  Revue  d'Economic  Poli- 
tique, Paris,  1913,  pp.  419-434. 

Irving  Fisher.  De  la  Necessity  d'une  Conference  Internationale 
sur  le  Cout  de  la  Vie.  La  Vie  Internationale,  Brussels,  Tome 
III,  Fasc.  12  (1913),  pp.  295-311. 

G.  M.  Boissevain.     "  Een  Ideale  Waarde-Standaard  ?  "     De  Econo- 

mist, The  Hague,  1913,  pp.  441-473. 
David  Davidson.     Irving  Fisher's  forslag  att  reglera  penningens 
kopkraft.    Economisk  Tidskrift   (Stockholm),   Haft  3,  1913, 
pp.  88-107. 


296  STABILIZING   THE   DOLLAR  [App.  VI 

W.  Eggenschunjler.  Review  of  article  in  American  Economic 
Review  Supplement,  March  1913.  Archiv  fiir  Sozialwissen- 
schaft  und  Sozialpolitik,  Tubingen,  Germany,  Band  37,  Heft  I, 
July  1913,  pp.  258-264. 

Irving  Fisher.  Objections  to  a  Compensated  Dollar  Answered. 
American  Economic  Review,  Dec.  1914,  pp.  818-839. 

D.  J.  Tinnes.  Tinnes'  Market  Gage  Dollar  an  Ideal  Measure  of 
Value.     Leaflets  1-4,  Privately  published,  1917. 

Irving  Fisher.  Standardizing  the  Dollar.  University  of  Cali- 
fornia Chronicle,  October  1917,  pp.  347-363. 

D.  J.  Tinnes.  The  Market  Gage  Dollar  (An  Ideal  Measure  of 
Value).  The  Quarterly  Journal  of  the  University  of  North 
Dakota,  Jan.  1918,  pp.  187-192. 

Irving  Fisher.  Stabilizing  the  Dollar  in  Purchasing  Power.  (In 
American  Problems  of  Reconstruction,  EUsha  Friedman, 
Editor,  New  York,  Dutton,  1918,  pp.  361-390.) 

D.  J.  Tinnes.  The  Market  Gage  Dollar.  American  Economic  Re- 
view, September  1918,  pp.  579-584. 

Irving  Fisher.  Stabilizing  the  Dollar.  American  Economic  Re- 
view Supplement,  March  1919,  pp.  156-160. 

G.  H.  Knibbs.  Consideration  of  the  Proposal  to  Stabilize  the  Unit 
of  Money.  American  Economic  Review,  June  1919,  pp.  244- 
255.     Rejoinder  by  Irving  Fisher,  pp.  256-262. 

D.  J.  Tinnes.  An  American  Standard  of  Value.  American  Eco- 
nomic Review,  June  1919,  pp.  263-266. 

Edward  T.  Peters.  On  Stabilizing  the  Dollar.  Quarterly  Journal 
of  Economics,  Aug.  1919,  pp.  652-671. 


INDEX 


Act  to  stabilize  the  dollar,  tentative 
draft  of  an,  205-213. 

Adjustment  of  salaries  and  wages 
after  an  upward  price  movement, 
55-56. 

Alternative  plans  for  stabilization 
of  dollar,  252-261. 

American  Economic  Association,  re- 
port of  Committee  of,  on  pur- 
chasing power  of  money,  33  ;  Com- 
mittee of,  quoted  on  plan  for 
stabilizing  the  dollar,  275-276. 

American  Federation  of  Labor,  reso- 
lution of,  in  favor  of  a  dollar  of 
stabilized   purchasing  power,   277. 

Anderson,  B.  M.,  Jr.,  approval  by, 
of  proposal  to  stabilize  value  of 
dollar,  90  n. ;  governmental  con- 
trol of  gold  production  suggested 
by,  260 ;  member  of  committee 
in  favor  of  stabilization  plan,  275. 

Approval  by  economists,  financiers, 
and  others  of  plan  for  stabilizing 
the  doUar.  274-278. 

Argument  from  probability,  regard- 
ing relation  between  monetary 
inflation  and  price  fluctuation, 
17-19  ;   from  statistics,  19-23. 

Artificiality  of  a  fixed-weight  dollar, 
106-107. 

Assignats  of  French  Revolution,  6, 
259. 

Austin,  O.  P.,  address  on  "Prices, 
Yesterday,  Today,  and  Tomor- 
row," quoted,  22-23;  quoted  on 
inflation,  35. 

Australia,  use  of  index  numbers  of 
prices  for  adjusting  wages  in,  283. 

Austria,  effect  of  Great  War  on 
prices  in,  8. 


Babson,  Roger,  cited  on  losses  of 
street  railways,  57 ;  in  favor  of 
stabilization  plan,  275. 

Bank  credit,  effect  on,  of  proposed 
plan  for  stabilizing  the  dollar, 
168-172. 

Bank  discount,  regulative  function 
of  rate  of,  170-172. 

Barbour,  Sir  David,  The  Standard 
of  Value,  quoted,  43 ;  approval 
by,  of  plan  for  stabilizing  the 
dollar,  275. 

Barron,  C.  W.,  example  supplied 
by,  of  contract  in  terms  of  a  com- 
modity, 280. 

Bell,  Chas.  A.,  calculation  of  a  special 
index  number  by,   151-152. 

Bengal,  rate  of  assessment  of,  57. 

Bibliography  of  literature  relating 
to  stabilization  plans,   286-296. 

Bimetallism,  literature  on,  288-289. 

Bland-Allison  Act,  causes  leading 
up  to,  265-266. 

Bolshevist  Government,  paper  money 
inflation  by,  30. 

Bondholders,  position  of,  under  ris- 
ing and  under  falling  prices.  58 ; 
plight  of,  at  present  time,  61 ; 
position  of,  in  period  of  falling 
prices,  77. 

Brassage  fee,  for  deposit  of  gold 
bullion,  100,  104 ;  as  a  means  of 
preventing  speculation  in  gold, 
139-142,  147;  as  a  factor  in 
determining  stabilization  process, 
183  ff. ;   the  ideal,  197. 

Bryan  campaign,  downward  price 
movement  resulting  in,  7,  68. 

Bullock,  C.  J.,  Monetary  History  oj 
United  States,  cited,  35,  61. 


297 


298 


INDEX 


Bureau  of  Labor  Statistics,  United 
States,  index  number  of,  4-5 ; 
figures  from,  56 ;  commodities 
used  by,  in  making  up  index  num- 
ber, 86-87 ;  index  number  of, 
to  be  a  guide  in  making  proposed 
changes  in  dollar's  weight,  95-96. 

Canada,  price  movement  in,  from 
1896  to  1914,  8;  effect  of  Great 
War  on  prices  in,  9 ;  chief  index 
numbers  current  in,  286. 

Cassel,  Gustav,  cited  on  correspond- 
ence between  money  supply  and 
price  level,  30. 

Chambers  of  Commerce  in  favor  of 
stabilization  plan,  276. 

China,  similarity  of  price  movements 
in  India  and,  25 ;  fixed  rate  of 
import  duties  of,  57  n. 

Circular  reasoning  in  regard  to  price 
movements,  14-15. 

Clark,  J.  M.,  paper  by,  on  "Po.ssible 
Complications  of  the  Compensated 
Dollar,"  198  n. 

Class  hatred  traceable  to  muck- 
raking, 67-68. 

Cleveland,  Treadwell,  quoted  on 
aim  of  stabilization  plan,  217. 

"Coin's  Financial  School,"  quack 
remedy  for  price  convulsions  con- 
tained in,  75;  remarkable  vogue 
of,  267. 

Cold  storage,  as  a  stabilizer  of 
prices,  13. 

Conservatism,  as  an  obstacle  to 
plan  for  stabilizing  the  dollar,  114, 
231-240;  lessening  of,  as  the 
one  great  obstacle,  by  Great  War, 
239. 

Continental  paper  money,  effects  of,  6. 

Contracts,  upsetting  of,  by  price 
movements,  54-55 ;  advantages 
to,  of  proposed  plan  for  stabiliz- 
ing dollar,  108-109 ;  made  in 
terms  of  a  commodity,  as  an 
attempt  at  monetary  stabiUza- 
tion,  279-280. 

Cost  of  living,  high.  See  High 
cost  of  living. 

Credit  inflation,  during  Great  War, 
30-34 ;  subtle  and  enticing  quali- 
ties of,  264.     See  Inflation. 


Crime  of  '73,  the,  68,  75. 

Crises  resulting  from  price  fluctua- 
tions, 66. 

Cycles  in  trade  caused  by  price 
fluctuations,  65-66. 

D'Abernon,  Lord,  quoted  on  advanc- 
ing prices  in  England,  23 ;  cited 
on  labor  discontent  due  to  high 
prices,  profiteering,  and  grafting, 
69-70 ;  cited  on  rate  of  fall  in 
value  of  money,  270. 

Debtor  and  creditor,  opposition  of 
interest  between,  a  supposed  ob- 
stacle to  stabilization  of  dollar, 
240-248. 

Deposit  currency,  price  level  affected 
by,  51-52. 

Discontent,  caused  by  upward  price 
movement,  66-68;  caused  by 
falling  prices,  68-69 ;  as  a  result 
of  war  prices,  69-71 ;  examples 
of,  growing  out  of  instability  of 
monetary  standards,  265-267. 

Dollar,  the  only  unit  unstandardized, 
81-84  ;  suggestion  of  an  imaginary 
composite  goods-dollar,  84-87 ; 
artificiality  of  a  fixed-weight,  106— 
107.     See  Gold  doUar. 

England,  price  movements  in,  as 
measured  by  index  numbers  from 
1789  forward,  6  ;  price  movements 
in  India  and,  under  different  mone- 
tary standards,  27 ;  ratio  between 
price  levels  of  America  and, 
compared  with  ratio  of  American 
to  English  money,  28  ;  correspond- 
ence in,  between  money  supply 
and  price  level,  30 ;  chief  index 
numbers  current  in,  287. 

European  war,  effect  of,  on  price 
movements,  8-9 ;  effect  of,  on 
bank  credit,  169-170. 

Exports  and  imports,  effect  on,  of 
plan  for  stabilizing  dollar,  177— 
179. 

Farmer-and-buggy  illustration,  73. 

Favorable  opinions  of  proposed  plan 
for  stabilizing  dollar,  273-278. 

Ferguson,  Professor,  quoted  on  con- 
tracts made  in  terms  of  a  commod- 
ity, 279. 


INDEX 


299 


Fiat  money  system,  charge  that 
stabilization  plan  is  a,  224. 

Finished  products  and  raw  materials, 
reasoning  in  a  circle  regarding,  15. 

Fischer,  L.  A.,  History  of  Standards 
of  Weights  ami  Measures  of  United 
States,  cited,  238. 

Fisher,  Irving,  Why  Is  the  Dollar 
Shrinking,  cited,  11 ;  The  New 
Price  Revolution,  cited,  11,  65, 
119;  articles  by,  on  price  fluctua- 
tions, cited,  20;  article  on  "The 
'Scarcity'  of  Gold,"  cited,  35; 
Purchasing  Power  of  Money,  cited, 
51  n.,  154,  260,  262;  articles  on 
"Equation  of  Exchange  for  1914, 
and  the  War,"  cited,  52 ;  The  Rate 
of  Interest,  cited,  64 ;  article  on 
"Adjusting  Wages  to  the  Cost  of 
Living,"  cited,  261 ;  member  of 
American  Economic  Association 
Committee  on  Purchasing  Power 
of  Money,  275. 

Fisher,  Willard,  account  by,  of  early 
experiments  with  tabular  stand- 
ard, 281. 

Fixed  incomes,  mockery  made  of, 
by  money  inflation,  63. 

Fixity  of  value  of  money,  illusion  in 
regard  to,  36-39. 

Fox  well,  H.  S.,  Papers  on  Current 
Finance,  cited,  33. 

France,  effect  of  Great  War  on 
prices  in,  9;  index  numbers 
current  in,  287. 

Franklin,  Fabian,  Cost  of  Living, 
cited,  13. 

Fraser,  Drummond,  advocate  of 
"Continuous  borrowing,"  33. 

Free  trade,  idea  of,  stimulated  by 
rising  prices,  78  n. 

Free-trade  countries,  prices  in,  12. 

George,  Henry,  single-tax  prop- 
aganda of,  74. 

Germany,  effect  of  Great  War  on 
prices  in,  8,  9 ;   war  finance  in,  32. 

Gold,  illusion  concerning  fixity  of 
value  of,  36-39 ;  comparative 
instability  of,  as  standard,  39-41 ; 
results  of  sudden  increase  in  supply 
of,  45-49 ;  method  of  changing 
weight  of,    91-94 ;    prevention   of 


speculation  in,  139-147 ;  a  fetish 
that  is  erratic  and  tricky,  237 ; 
suggestion  for  governmental  con- 
trol of,  200. 

Gold  certificates,  reserve  against, 
125  ff. 

Gold  clause  in  existing  contracts, 
treatment  of,  under  plan  for 
stabiHzing  the  dollar,   163-168. 

Gold  coins,  proposed  circulation  of, 
in  form  of  paper  only,  91-94 ; 
disposal  of  existing,  under  plan 
for  stabilizing  the  dollar,  161-163. 

Gold  dollar,  to  be  retained,  under 
use  of  proposed  goods-dollar,  87- 
90 ;  merely  the  weight  of,  to  be 
varied,  90-91 ;  method  of  conform- 
ing,  to  goods-dollar,   95-100. 

Gold  exchange  standard,  correction 
of  current  money  units  by,  284 ; 
writings  on,   289-290. 

Gold  inflation,  30,  32;  method  of 
transforming  into  credit  inflation 
during  Great  War,  33. 

Gold  points  of  exchange,  effect  of 
stabilization  plan  on,   179-180. 

Gold  producers,  possible  objection 
of,  to  stabilization  of  dollar,  248- 
250. 

Gold  reserves,  international  rela- 
tion between  price  levels  and, 
175-177. 

Gold  Standard,  price  movements 
in  countries  using,  7 ;  similarity 
of  price  movements  in  countries 
having,  23-25 ;  effect  of  a  country 
changing  from,  to  silver  standard, 
26 ;   the  essentials  of  a,  94-95. 

Gold  theory,  so-called,  not  implied 
in  stabilization  plan,  215. 

Goods-dollar,  an  imaginary,  84- 
87 ;  machinery  for  conforming 
our  gold  dollar  to  the,  95-100 ; 
argument  that  it  is  not  ideal, 
224-225;  unrestricted  deposit  of 
goods-dollars,  as  an  alternative 
plan  for  stabilization  of  mone- 
tary unit,  255-256. 

Governmental  control  of  gold  pro- 
duction, proposal  for,  260. 

Governmental  interference,  requir- 
ing of,  not  a  valid  objection  to 
stabilization  plan,  233-234. 


300 


INDEX 


Greenback  inflation  during  Civil 
War,  7. 

Hadley,  President  Arthur  T.,  in 
favor  of  stabilization  plan,  274 ; 
quoted,  275. 

Hammond,  John  Hays,  stabilization 
plan  approved  by,  275. 

Hepburn,  A.  B.,  History  of  Currency 
in  the  United  States,  cited,  84. 

Higginson,  Henry  L.,  in  favor  of 
stabilization  plan,  274. 

High  cost  of  living,  various  remedies 
proposed  for,  79-81 ;  effect  of 
public  interest  in,  263-272 ;  pro- 
posals for  international  conference 
on,  273-274. 

High  prices,  causes  of,  found  to  be 
of  monetary  origin,  10-52 ;  evils 
of,  53 ;  result  of,  not  general  im- 
poverishment, 53-54 ;  chief  evil 
of,  in  unequal  effect  on  individual 
incomes,  54 ;  effects  on  contracts, 
54-55 ;  adjustments  of  salaries 
and  wages  made  necessary  by, 
55-56 ;  disadvantageous  results 
of,  on  rates  fixed  by  law  or  cus- 
tom, 56-57  ;  results  of,  in  the  way 
of  social  injustice,   61-63. 

Holland,  attempt  of,  dvu-ing  Great 
War,  to  safeguard  its  money,  285. 

House  of  Representatives,  resolu- 
tion by,  looking  toward  a  stabilized 
dollar,  277. 

Ignorance,  an  obstacle  to  plan  for 
stabilizing  the  dollar,  115. 

Illusions,  popular,  in  regard  to 
money,  35-39 ;  methods  of  eman- 
cipation from,  41-44. 

Index  nun:ibers,  a  device  to  measure 
movement  of  prices,  1-2  ;  method 
of  determining,  2 ;  effect  of 
weighted  averages  on,  2-3  ;  various 
systems  of,  4 ;  index  number 
of  United  States  Bureau  of  Labor 
Statistics,  4 ;  history  of,  5 ;  price 
movements  since  1780  as  measured 
by,  6-8 ;  to  be  a  guide  in  making 
proposed  changes  in  dollar's  weight, 
95-96 ;  lack  of,  a  reason  for 
overlooking  plan  for  stabilizing 
the     dollar,      113-114;      how     to 


select  right  type  of,  to  carry  out 
stabilization  plan,  147-154;  cal- 
culation of  stabilized,  201-203 ; 
diagram  of,  with  and  without 
stabilization,  204 ;  adjustment  of 
wage  payments  by,  since  Great 
War,  281  ;  instances  of  modern 
use  of,  282-284 ;  bibliography  of, 
286-288. 

Index  Visible,  Inc.,  plan  of  adjust- 
ment of,  283. 

India,  similarity  of  price  movements 
in  China  and,  25;  price  move- 
ments in  England  and,  under 
different  monetary   standards,  27. 

Indian  Gold  Exchange  System,  an 
innovation  no  greater  than  stabili- 
zation plan,  231. 

Industrial  companies,  increase  in 
earnings  of,  due  to  upward  price 
movement,  70-71. 

Inelasticity,  charge  of,  brought 
against  stabilization  plan,   229. 

Inflation,  paper  money,  gold,  and 
credit,  30 ;  war  finance  a  prolific 
source  of,  30 ;  in  Russia  before 
and  during  Bolshe\dst  regime,  30, 
32 ;  in  Germany  diu"ing  the  war, 
32 ;  in  United  States  by  means  of 
Liberty  Bonds,  32-33 ;  gold,  trans- 
formed into  credit  inflation,  33 ; 
viewed  as  legal  counterfeiting, 
36 ;  Santa  Claus  illustration  of, 
45-49 ;  how  prices  are  raised  by, 
49-52 ;  the  last  resource  of  war 
finance,  226 ;  incompatibility  of 
stabilization  and,  226-227. 

International  aspects  of  plan  for 
stabihzing  the  dollar,  172-182. 

International  conference  on  high  cost 
of  living,  proposals  for,  273-274. 

International  governmental  control 
of  gold  mining  suggested,  260. 

International  Trade  Union  Con- 
ference at  Berne  (1919),  resolu- 
tion by,  to  prevent  depreciation 
of  purchasing  power  of  wages,  277. 

Irish  land  agitation,  stimulated  by 
falling  prices,  74,  78  n. 

I.  W.  W.,  causes  of  growth  and 
bitterness  of,  67 ;  could  have 
been  avoided  by  standardizing 
monetary  units,  117. 


INDEX 


301 


Jevons,  W.  Stanley,  responsible  for 
index  numbers,  5 ;  price  move- 
ments as  measured  by  index 
number  of,  6-7,  113;  popular 
interest  in  stability  of  money 
leading  to  devising  of  index  num- 
ber by,  265 ;  quoted  concerning 
use  of  precious  metals  as  standard 
of  value  in  long-lasting  contracts, 
280 ;  work  by,  dealing  with  prin- 
ciples of  index  numbers,  288 ; 
an  enthusiastic  advocate  of  the 
tabular  standard,  292-293. 

Kansas,  land  problem  in,  accentuated 
by  falling  prices,  74. 

Kelsey,  Clarence  H.,  approves,  274. 

Kemmerer,  E.  W.,  article  on  "  Infla- 
tion," cited,  20  ;  member  of  commit- 
tee in  favor  of  stabilization  plan,  275. 

King,  W.  I.,  Wealth  and  Income  of 
People  of  United  States,  cited,  20 ; 
statistics  by,  54. 

Labor,  proposal  for  a  money  based 
on,  259-260. 

Labor  troubles  caused  by  high  cost 
of  living,  69-71. 

Land  problem,  produced  during 
period  of  falling  prices,  74. 

Landry,  Adolphe,  in  favor  of  stabili- 
zation plan,    275. 

Latin  Union  for  maintaining  bi- 
metallism, 181. 

Lewis,  Gilbert  N.,  alternative  stabili- 
zation plan  suggested  by,  252. 

Liberty  Bonds,  inflation  by  means 
of,  32-33. 

Loria,  AchiUe,  an  advocate  of  stabili- 
zation plan,  275. 

McAdoo,  W.  G.,  railway  rates  raised 
by,  72. 

McKechnie,  Major  W.  E.,  quoted 
on  assessment  of  Bengal,  57. 

Marshall,  Alfred,  article  by,  antici- 
pating stabilization  plan,  293. 

Massachusetts,  use  of  tabular  stand- 
ard in  Colonial,  280-281. 

Meade,  Professor,  cited  on  stability 
in  price  of  trust-made  products, 
12  n. 

Meeker,    Dr.    Royal,    index   number 


of  Bureau  of  Labor  Statistics 
perfected  by,  4-5 ;  in  favor  of 
stabilization  plan,  274 ;  quoted, 
275. 

Menger,  Carl,  a  writer  on  irredeem- 
able paper  money,  291. 

Middle  Ages,  price  levels  in  the,  5-6. 

Middlemen,  rise  of  prices  not  due 
to,  13. 

Miller,  Dr.  A.  C  quoted,  34,  119. 

Mint  price,  fallacy  of  the,  172-175. 

Mitchell,  Wesley  Clair,  diagrams 
adapted  from,  3,  4,  14 ;  statistics 
by,  20-21,  25  n. ;  member  of 
committee  in  favor  of  stabiliza- 
tion plan,  275 ;  publication  by, 
showing  application  of  index  num- 
bers to  war  prices  in  different 
countries,  287. 

Monetary  inflation  as  cause  of 
fluctuations  in  prices  of  commodi- 
ties, 19. 

Money,  popular  ideas  of,  as  affected 
by  price  movements,  263-272. 

Money  illusions,  discussion  of,  35- 
39. 

Money-lenders,  different  effects  on, 
of  rising  and  of  falling  prices,  58- 
59. 

Money  standards,  relation  of  price 
levels  to,  23-29. 

Money  supply,  how  price  levels 
follow  the,  29-30. 

Money  imit,  attempts  at  correcting 
the,  284-285. 

Muckraking,  reason  for  and  ill 
effects  of,  67 ;  avoidance  of, 
possible  by  standardizing  mone- 
tary units,  117. 

Murray,  Nat  C,  statistics  by,  20. 

Newcomb,  Simon,  article  by,  antici- 
pating plan  to  stabilize  the  dol- 
lar, 293. 

New  England  Association  of  Pur- 
chasing Agents,  in  favor  of  stabili- 
zation plan,  276. 

Newlands,  Senator,  stabilization  plan 
approved  by,  274. 

New  Zealand,  labor  troubles  in,  due 
to  high  cost  of  living,  70. 

Nicholson,  J.  S.,  War  Finance, 
quoted,  21  n.,  30;    cited  on  quick- 


302 


INDEX 


ness  of  response  of  index  number 
to  change  in  money  supply,  152. 
Norton,    J.    Pease,    "Stocks    as    an 
Investment  When  Prices  Are  Ris- 
ing," quoted,  Gl. 

Ogburn,  W.  F.,  index  numbers  for 
use  of  Seattle  flouring  mills  cal- 
culated by,  283. 

"One  Way  Out,"  solution  proposed 
in,  for  high  cost  of  living,  79. 

Overnight  speculation  in  gold,  pre- 
vention of,  139-142. 

Owen,  Senator  Robert  L.,  in  favor 
of  stabilization  plan,  274. 

Panaceas,    attitude    of    devotees    of, 

toward    stabilization    plan,     250- 

251. 
Panics,  traceable  to  price  fluctuations, 

65-66. 
Paper  money,   fluctuations   of   price 

level    from    use    of    irredeemable, 

5-6 ;     literature    on   irredeemable, 

290-291. 
Paper     money     inflation,     enormity 

of  evils  of,  61. 
Par,    selection    of    the,    in    carrying 

out  plan  for  stabilizing  the  dollar, 

154-161. 
Parker,  Carleton,  on  results  of  public 

muckraking,  67. 
Peabody,    George   Foster,    favorable 

opinion   held    by,    of   stabilization 

plan,  274. 
Perrin,  John,   stabilization  plan  ap- 
proved by,  274  ;    quoted,  275. 
Persons,     Warren     M.,     member    of 

committee  in  favor  of  stabilization 

plan,  275. 
Polish     Engineers     and     Merchants 

in     America,      stabilization     plan 

favored  by  Society  of,  276. 
Populism,  reason  for  rise  and  cessa- 
tion of,  68-69. 
Precedents  for  plan  of  stabilizing  the 

dollar,  116,  279-285. 
Price,  Theodore  H.,  article  on  "The 

Index  Number  Wage,"  cited,  72. 
Price  control,  impracticability  of,  as 

remedy  for  high  cost  of  living,  102. 
Price  levels,   medieval,   5-6 ;    follow 

money  standards,  23-29. 


Price  movements,  index  numbers  a 
device  for  measuring,  1-5;  gen- 
eral upward  trend  of,  5-6  ;  history 
of,  during  past  century  and  a 
quarter,  6-8 ;  effect  of  the  Great 
War  on,  8-9 ;  causes  of,  10  fif. ; 
various  reasons  assigned  for,  10- 
12 ;  effect  on,  of  profiteers,  specu- 
lators, and  middlemen,  13-14 ; 
tendency  to  reason  in  a  circle  in 
regard  to,  14-15;  fallacy  of 
accounting  for,  by  selected  cases, 
16-17  ;  argument  from  probability, 
pointing  to  monetary  inflation 
as  cause  of,  17-19 ;  argument 
from  statistics  regarding,  19-23 ; 
similarity  of,  in  countries  having 
like  monetary  standards,  23-25; 
difference  in,  in  countries  with 
unlike  monetary  standards,  25— 
28  ;  correspondence  of,  with  money 
supply,  29-30 ;  other  causes  of, 
than  quantity  of  money,  51-52 ; 
conclusion  as  to,  that  they  are 
due  to  monetary  causes,  52; 
evils  of,  53  ff. ;  chief  evil  in  un- 
equal effect  on  individual  incomes, 
54 ;  hardships  worked  in  regard 
to  contracts,  54-55 ;  evils  as  to 
salaries  and  wages,  55-56 ;  effects 
of,  on  rates  fixed  by  law  or  cus- 
tom, 56-57 ;  periods  before  and 
after  1896  contrasted,  58-59; 
social  injustice  wrought  by,  61- 
63 ;  trade  cycles  due  to,  65-66 ; 
bad  remedies  for  evils  of,  74-76 ; 
loss  resulting  from,  is  general, 
76-78;  a  remedy  for,  79-103; 
effects  of,  on  popular  ideas  of 
money,  263-272  ;  proposed  special 
international  study  of,  273-274. 

Profiteering,  effect  of,  on  price 
movements,  13 ;  rising  prices 
responsible  for,  rather  than  the 
result  of,  14 ;  rise  of,  in  period  of 
rising  prices,  58-59 ;  remedy  for, 
60 ;  justification  of  so-called,  in 
rents,  72. 

Protective  tariffs,  idea  of,  stimulated 
by  falling  prices,  78  n. 

Quack  remedies  for  price  convul- 
sions, 74-76. 


INDEX 


303 


Quantity  theory  of  money,  exposi- 
tion of,  29  ff . ;  not  accepted  by 
all  students  of  money,  51  n. ; 
assumption  of,  not  implied  in 
stabilization  plan,  215-216;  the 
objection  that  stabilization  plan 
contradicts,  216-217. 

Railroads,  hardships  of,  from  up- 
ward price  movement,  56-57 ; 
why  rise  in  rates  of,  is  necessary, 
71-72. 

Rapidity  of  circulation,  price  level 
affected  by,  51-52. 

Rates  fixed  by  law  or  custom,  effects 
of  upward  price  movement  on, 
56-57. 

Raw  materials  and  finished  products, 
circular  reasoning  in  regard  to, 
15. 

Redemption  via  warrants,  alterna- 
tive plan  of,  254-255. 

Redemption  warrants,  an  alterna- 
tive stabilization  plan,  253-254. 

Redfield,  Secretary,  effort  of,  to 
stabilize  prices  by  price  fixing, 
267. 

Reformers,  objections  of,  to  stabili- 
zation of  dollar,  250-251. 

Remedies,  bad,  for  evils  resulting 
from  price  fluctuations,  74-76 ; 
variety  of,  good  and  bad,  79-81. 

Rent  profiteers,  so-called,  72. 

Resentment  as  one  evil  resulting 
from  redistribution  of  wealth 
through  price  fluctuations,  66-68. 

Reserve  against  gold  certificates, 
effect  on,  of  stabilizing  the  dollar, 
125-126;  restabilizing  the,  126- 
128 ;  definite  and  indefinite  sys- 
tem of,  contrasted,  129-131. 

Retail  prices,  movements  of,  com- 
pared with  those  of  wholesale 
prices,  13-14. 

Ricardo,  abolition  of  gold  coins 
proposed  by,  92  n. 

Rist,  Charles,  article  by,  cited,  61  n. 

Rooke,  John,  work  by,  anticipating 
plan  to  stabilize  the  dollar,  293. 

Rowe,  Leo  S.,  approves,  275. 

Russell,  H.  B.,  book  by,  on  "  Interna- 
tional Monetary  Conferences,"  182. 

Russia,  price  movements  in,  during 


Great  War,  8-9 ;  methods  of 
war  finance  in,  30 ;  correspondence 
in,  between  money  supply  and 
price  level,  30. 

Salaries,  adjustment  of,  after  up- 
ward price  movement,  55-56. 

Santa  Claus  illustration,  to  show 
results  of  addition  to  total  cir- 
culation, 45-49. 

Sauerbeck,  index  number  of,  6. 

Scarcity  of  money,  illusions  regard- 
ing, 16,  35-36. 

Scotch  Fiars  prices,  243,  245 ;  an 
example  of  contract  made  in 
terms  of  a  commodity,  279-280. 

Shakespeare,  an  economic  truth  as 
stated  by,  59. 

Sherman  Act,  causes  leading  to 
passage  of,  265-266. 

Silver  standard,  price  movements 
in  countries  using,  7,  25. 

Single  taxers,  as  objectors  to  stabili- 
zation of  dollar,  250. 

Sixteen-to-one  remedy  for  falling- 
price  movement,  75 ;  campaign 
of  1896,  266. 

Smith,  J.  Allen,  plans  of,  for  stabiliz- 
ing monetary  units,  294. 

Social  injustice  resulting  from  chang- 
ing price  level,  61-03. 

Socialism,  cue  taken  by,  from  high 
cost  of  living,  68 ;  growth  of,  due 
to  rising  costs  of  living,  before  the 
war,  69. 

Socialists,  objections  of,  to  stabili- 
zation plan,  250-251. 

Spain,  safeguarding  of  money  by, 
during  Great  War,  285. 

Spanish  paper  money,  counterfeit, 
issued  by  Bolshevist  Government, 
30,  32. 

Special  interests,  an  obstacle  to 
stabilization  of  the  dollar,  240- 
251. 

Speculation,  evening-up  of  price 
fluctuations  by,  13 ;  activity  of, 
in  period  of  changing  price  levels, 
64. 

Speculation  in  gold,  methods  of 
dealing  with,  139-147. 

Speculators,  objection  of,  to  stabili- 
zation plan,  251. 


304 


INDEX 


Stabilizing  the  dollar,  need  for, 
81-84 ;  proposed  method  of,  84- 
87 ;  adjustment  of  machinery 
for,  95-100 ;  advantages  of  pro- 
posed method,  over  other  remedies, 
101-103 ;  summary  of  plan  for, 
104-105 ;  crux  of  plan,  105 ;  ad- 
vantages of,  in  case  of  contracts, 
108-109 ;  not  a  cure-all  for  all 
financial  complaints,  110-112  ;  rea- 
son for  previous  overlooking  of 
remedy,  113-114;  obstacles  in 
way  of  plan,  114-116;  precedents 
for  plan,  116,  279-285;  troubles 
that  might  have  been  avoided 
by,  116-118;  technical  details 
of  plan,  125  ff. ;  effect  of,  on 
present  100%  reserve,  125-126; 
operation  of,  in  small  and  in  large 
nations,  131-132;  selection  of 
the  index  number,  147-154;  selec- 
tion of  the  par  or  price  level, 
154-161 ;  disposal  of  existing 
gold  coins,  161-163 ;  the  gold 
clause  in  existing  contracts,  163- 
168 ;  bank  credit  and  the  plan, 
168-172  ;  international  aspects  of 
plan,  172-182 ;  illustrative  nu- 
merical examples  to  show  opera- 
tion of  stabilizing  process,  1S3- 
205 ;  tentative  draft  of  an  act 
for,  205-213 ;  discussion  of  dis- 
approval of  plan,  214  ff. ;  dis- 
approval due  to  misunderstand- 
ings, 214-224;  alleged  defects 
in,  224-231  ;  conclusion  on  alleged 
defects  of  plan,  230-231;  the 
obstacle  of  conservatism,  231- 
240 ;  the  obstacle  of  special  in- 
terests, 240-251  ;  alternative  plans, 
252-262 ;  origin  and  growth  of 
present  plan,  272-274;  approval 
of  plan,  274-278;  Hterature  of 
remote  and  direct  anticipations 
of  plan,  288-294;  list  of  recent 
writings  on,  294-296. 

Standard  hypothetical  case,  to  show 
operation  of  stabilizing  process, 
183-187. 

Standardizing  of  monetary  units. 
See  Stabilizing  the  dollar. 

Standard  of  value,  efTect  of  stabiliza- 
tion plan  on,  220-221. 


Statistics  concerning  relation  be- 
tween monetary  inflation  and 
price  fluctuation,  19-23. 

Stockholders,  position  of,  under 
rising  and  under  falling  prices,  58. 

Street  railways,  losses  of,  from  up- 
ward price  movement,  57  ;  reason 
for  raising  fares  on,  72. 

Sumner,  History  of  American  Cur- 
rency, cited,  61. 

Supply  and  demand,  relation  of 
stabilization  plan  to,  219-220. 

Surplus,  emplojonent  of,  under  plan 
for  a  50%  minimum  reserve, 
133-137 ;  saving  in  taxes  by 
interest  on,  137. 

Sweden,  prohibition  of  import  of 
gold  by,  in  1916,  285. 

Tabular  standard,  as  an  alternative 
for  stabilization  plan,  260-262 ; 
examples  of  use  of,  280-284 ; 
question  of  origin  of  idea  of,  281  n. ; 
writings  on,  291-293. 

Tinnes,  D.  J.,  proposals  in  writings 
of,  anticipating  present  stabiliza- 
tion plan,  294. 

Tithe  averages,  in  England,  made 
to  vary  with  value  of  grain,  279. 

Trade  cycles,  caused  by  price  fluctua- 
tions, 65-66. 

Trust-made  products,  price  of,  more 
stable  than  that  of  competitive 
products,  12  n. 

Uncertainty,  as  an  evil  resulting 
from  price  fluctuations,  63-65. 

Underwood  tariff,  adopted  in  period 
of  rising  prices,  78  n. 

United  States,  price  movements 
in,  as  measured  by  index  num- 
bers, 7-8 ;  effect  of  Great  War 
on  prices  in,  8-9 ;  rise  in  prices 
in,  due  to  gold  inflation  and  to 
credit  inflation,  23  ;  ratio  of  Eng- 
lish price  level  to  that  of,  compared 
with  ratio  of  American  to  English 
money,  28 ;  correspondence  be- 
tween price  levels  and  money 
supply  in,  29-30;  credit  inflation 
in,  du'ring  the  war,  32-33  ;  extent 
of  war  inflation  in,  34 ;  chief 
index  numbers  current  in,  286. 


INDEX 


305 


Violence  caused  by  redistribution 
of  wealth  through  price  fluctua- 
tions, 67-68. 

Volume  of  trade,  as  an  element  in 
fluctuation  of  price  levels,  52. 

Wages,  circular  reasoning  in  regard 
to  prices  and,  14-15 ;  adjustment 
of,  after  an  upward  price  move- 
ment, 55-56 ;  actual  lowering  of, 
since  1913,  56;  effect  on,  of  period 
of  falling  prices,  77-78. 

War,  effects  of,  on  stabilization  plan, 
226-228. 

Warburg,  Paul,  suggestion  by,  con- 
cerning use  of  index  number  of 
prices,  172. 

War  inflation,  discussion  of,  30-34 ; 
extent  of,  34-35. 


War  Labor  Board,  use  of  index  num- 
bers by,  283. 

War  prices,  discontent  caused  by, 
69-71. 

Wars,  business  crises  following,  66. 

Weighted  average,  explanation  of, 
2-3. 

Wholesale  prices,  faster  movement 
of,  than  of  retail  prices,  13-14. 

Wicksell,  Knut,  advocate  of  regula- 
tive use  of  rate  of  bank  discount, 
172. 

Williams,  Aneurin,  proposal  in  writ- 
ings of,  anticipating  stabilization 
plan,  294. 

Wilson,  President,  address  on  High 
Cost  of  Living  by  (August  8,  1919), 
21. 


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